One of the biggest benefits of owning your own business is being able to write off certain expenses to lower your annual income tax liability. When done right, writing off business expenses, especially when they are investments in things or experiences you would invest in even if you did not have your business, is a lot like having the government subsidize the things you want to do in the world.
If you are starting a business, the good news is you can typically write off costs for starting, launching, and organizing your business. But you may face certain restrictions, and you need to know how to write off those expenses in a way that will benefit your business. To learn more, let’s take a look at the most common startup expenses businesses may write off for tax purposes.
You can write off many research expenses incurred when starting a business. Surveys, feasibility studies, market research, and similar costs are valid startup write-offs.
Many costs incurred while executing your business launch—like recruitment and training costs—can be deducted. Conversely, equipment purchases cannot be deducted because they’re subject to rules for deducting depreciation.
You can also write off the costs for creating your business entity. These typically include legal fees, accounting fees, and expenses for organizational meetings.
Now that you have a better idea of the type of startup expenses you can write off let’s go over how those expenses should be deducted.
The IRS puts a cap on first-year startup deductions at $5,000 and an additional $5,000 for organizational costs. But, if your startup expenses exceed $50,000, that first-year deduction cap will be reduced by the costs that exceed $50,000. Thus, if your startup expenses equal $54,000, your first-year deduction is reduced to $1,000. You would then lose the deduction entirely once your startup expenses exceed $55,000. In your second year, the rest of your expenses can be amortized and deducted in equal installments over 15 years.
If your business never gets off the ground and running, your startup costs could be considered personal costs and therefore non-deductible. In certain cases, however, these costs could be regarded as capital losses, so always consult with a tax advisor to ensure you are taking advantage of every tax break available to you.
As you can see, there are some big risks when it comes to identifying and allocating your expenses properly to maximize your deductions and minimize your tax liability. The decisions you need to make are important and shouldn’t be executed without first consulting with a trusted advisor, such as a Creative Business lawyer®. If you need tax help for your startup, start by sitting down with us. As your Creative Business Lawyer® we are experienced in helping startups achieve success through careful financial and legal planning. We will guide you to establish sound legal, insurance, financial, and tax systems for your business so you can focus on increasing revenue and enjoy the benefits entrepreneurship.
This article is a service of Gratia P. Schoemakers, Business Attorney. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.