Congratulations on starting your new business. With all the things that are involved in starting a new business, you may not have had the time to consider all the tax ramifications of a startup business. The IRS categorizes startup costs as those related to the research that went into the formation of your business and then the actual formation of the business. When it comes to startup tax deductions you need to keep accurate records of your expenses for up to one year before the opening of your business.
Business startup costs can be divided into three categories that you can claim as tax deductions:
1) Creating your business
When you first decided that you want to look into starting a business you will likely visit some potential locations where you might want your business to be situated. You have to see if there is a need for the product or service that you are thinking about starting in the area that you are considering. Another factor is whether or not you will be able to find the labor force that you will need locally. All of these things cost money and can be claimed as deductions as you decide to start your business.
2) Launching your business
Many of your startup costs are incurred in the launching of your business. You will probably need digital marketing services to let people know you are in business. You may need to get training for your employees. You must purchase the equipment necessary to run your business, and if you are selling a product you will need inventory. Interest and banking fees may be incurred if you are not solely using your own cash for upfront costs. You will need to pay utilities, rent, insurance, and other basic costs to get your business up and running.
3) Organizational expenses
This includes any licenses or permits that are required, legal fees to create your business entity and accounting fees as well. You may not incur all of these expenses until the end of your first year of business.
You may think that startup costs can only be deducted the year that you form your business, but that is not correct. Some of them will become part of your capital account and be amortized over the lifetime of your business. Startup taxes may be lower in the first year and it can be beneficial for you to spread some of these deductions out over 15 years when you will be making a profit.
In the first year of business, you can take a $5,000 tax deduction in startup costs if your total expenses are under $50,000. If they are over $55,000 then you can’t deduct anything and between $50,000 and $55,000, the amount over $50,000 is deducted from the $5,000 tax deduction.
Making sure that you take advantage of all the startup business tax deductions that you are entitled to is important for the financial health of your new business. Keeping records of all your expenses is extremely important. Having a good tax accountant is vital and at Chandler & Knowles CPA, we have the experience to take those records and determine the best way to use them to benefit your business when filing your taxes.