Start-Up – Income Tax Deductions

female entrepreneur on her laptop planning and budgeting for her startup

Start-Up – Income Tax Deductions

According to the IRS, a startup company that satisfies two requirements may claim a current deduction for eligible start-up expenses.

Do you want to start a new business? Although the current economic situation may make things difficult, the tax code at least gives you an advantage. You may be able to claim a current deduction for qualified start-up costs up to a certain level.

The basic assumption is that, unlike other “ordinary and necessary” business expenses that are now deductible, such as rent and supplies, start-up costs must normally be amortized over a period of 60 months. The month the business launches are when the write-off period starts.

Entrepreneurs, though, might benefit from a special break. In summary, a new business can claim a current deduction for eligible start-up costs if it meets two standards, according to the IRS.

  1. It’s a cost that a company could write off if it was incurred to run an already-running, profitable venture in the same industry as the one it entered.
  2. It is a cost that a company pays or incurs before the start of its active trade or activity.

What types of expenses are included? Here are a few startup expenses that are frequently deductible:

  1. Prospective market, product, labor supply, transportation facilities, and so forth;
  2. Salaries and wages for staff training; 
  3. travel and other essential costs for acquiring prospective distributors, suppliers, or customers; and salaries and fees for executives, consultants, or similar sorts of professional services.

But keep in mind that some costs are expressly not included. This includes expenses for starting a business (for example, licensing fees), expenses for attempting to buy a specific business, interest and taxes, research and experimental spending, and costs incurred by individual business owners. These costs, though, might qualify for other sorts of deductions.

Be mindful of this as well—

For costs above $50,000, the maximum existing deduction of $5,000 is phased away on a dollar-for-dollar basis. If your start-up costs for the year total $54,000, for instance, you can only deduct $1,000. A 60-month amortization period is required for the reminder. There is no existing write-off available if your charges are higher than $55,000.

The precise date that your company is “open for business” will depend on the specifics of your industry; but, in most cases, this indicates that you have begun providing products or services in exchange for money. This means that you cannot just declare yourself to be in business by posting a sign that reads “We Are Open” on a storefront window or door.

That’s not enough by itself.

Last but not least, under a similar provision, you are currently permitted to deduct up to $5,000 of your organizational costs. This typically comprises normal start-up expenditures for a corporation, partnership, or limited liability company (LLC), such as state incorporation fees, the cost of creating legal documents, and any associated legal and accounting services.

The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.

If you are a licensed tax professional and are interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here

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