by Janet Attard
Last Updated Friday, March 5, 2021
Starting a business is costly, but some of your startup expenses are tax deductible. Make sure you don’t miss out on any tax savings by finding out which of those expenses you can write off.
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Did you start a business last year? Here are deductions you may be entitled to for your startup expenses. (Please note, be sure to check with your accountant to verify all deductions and to identify things you might otherwise overlook.)
You’ve probably heard that one of the many benefits of owning your own business is the tax deductions associated with business ownership. But what are those deductions and which affect you? The IRS distinguishes between the expenses you incur before you actually open the business and the expenses you have once you are in business.
What expenses for starting a business are deductible?
The costs you incur to start your business are considered capital expenses. (Startup expenses are the expenses you have before you are ready to accept customers.) While most capital expenses are not deductible, under current IRS rules, you can elect to deduct up to $5,000 in business startup costs and $5000 in business organizational costs in the year your business launches, provided your startup costs are $50,000 or less. The $5,000 deduction is reduced by the amount your startup costs or organizational costs exceed $50,000.
Any startup or organizational costs in excess of the $5,000 can be amortized over a period of 180 months. There may be additional rules that affect your business, so be sure to consult with a professional tax advisor while you are planning your business, particularly if you will be investing a significant amount of money. Tax laws are complicated, and some decisions are irreversible.
Expenses that qualify as startup costs include the costs of researching the business and the costs of getting it going, such as initial advertising, employee training, consulting fees, and other fees you incur before you actually open your brick and mortar or virtual doors for business. Organizational costs are the cost you incur for legal fees, incorporation fees and certain other costs in getting the legal structure of the business set up. (See Chapter 8 in IRS publication 535.)
From a tax standpoint, when does your business actually begin?
You can be in business as soon as you are ready to accept customers. You don’t have to wait until you’ve made your first sale. The actual event that triggers you being in business (as opposed to starting a business) will vary by the type of business and your own personal way of operating. Something as simple as handing out business cards, setting up a website or a social media business page, can all signal that you are “open” and ready to accept business. Once you are actually in business, expenses you incur would be considered regular business expenses, not startup expenses.
What expenses can I deduct?
Any product or service purchased for use by or in your business is deductible if it is ordinary and reasonable for the type of business you run. Small businesses and schedule C filers will generally find their deductions fall into these broad categories:
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About the author:
Janet Attard is the founder of the award-winning Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets. Follow Janet on Twitter and on LinkedIn