Claiming Tax Deductions on Startup Costs

Startup costs are a major expense for any business owner, and therefore it’s important for you to know from the start what you can write off as a new business owner. In addition, it’s important to know how you can write off your tax deductions. Here is a look at the basics of claiming tax deductions on business startup costs.

Write everything down.

From the moment you even think about starting your business, start writing down everything related to the starting up of your business. Log any and all business related costs in an online spreadsheet or text document. That way, when it comes time to negotiate taxes with your attorney, you can come prepared with all of the information they could possibly need.

Don’t sell yourself short.

If you can prove that an expense was necessary for starting up your business, chances are it can qualify for a tax write-off. Be sure to consider all types of expenses, including product development, product testing, product analysis, marketing, market analysis, printing, travel, training, salary, and legal expenses. The IRS defines startup costs as any costs of “investigating the creation or acquisition of an active trade or business.” It also includes startup costs the cost of getting a business ready to operate, before you start generating income.

Know the rules.

According to the IRS, you can write off the first $5,000 in startup expenses in the year your business begins. The rest of your startup expenses must then be amortized over a period of 15 years (unless you close your business before that period ends, in which case you can write them off at the time of closing). Take note of the month you officially begin operating your business, because that is the month that your amortization period begins.

There are a few other legal distinctions to keep in mind as well. For example, if startup costs exceed $55,000, you cannot claim that $5,000 deduction during your first year. In addition, the types of expenses listed above can only be claimed as startup costs if your research and preparation result in the formation of a successful business. Moreover, equipment purchased for startup purposes is technically not considered a startup expense. Instead, you must write it off through depreciation. Depreciation taxes different types of tangible business property differently; this page about depreciation can give you more information.

Talk to your attorney.

Taxes, as they relate to small business, can quickly become very complex. A tax attorney can help you ensure that you are obeying regulations while maximizing your tax deductions. Keep in close contact with your small business tax attorney, especially during tax season, to ensure that you are claiming your deductions correctly and effectively.