Here at Whyte & Associates, Inc.
in Rancho Cucamonga, we hear from many new entrepreneurs asking for
tips to lower their tax bills. One of the most common questions is
whether startup costs are tax deductible. In most cases they are, but you will need an effective tax strategy and some advance planning to make the most of your available deductions.
The list of expenses involved in opening a business is
nearly endless. You may consider them all startup costs, but IRS has a
narrower definition. For tax purposes, startup costs are incurred after
the business plan is confirmed, but before the first sale occurs.
As an example, imagine you are considering opening a business, maybe a store or a restaurant. You consult a business coach for advice. Eventually, you decide that you are ready to be an entrepreneur, and that a restaurant is right for you. Next, you hire a consultant to help create a business plan. After a lackluster grand opening, you hire a PR firm to help you get more customers. These three expenses may seem similar, but only the consultant fee is a startup cost for tax purposes. You weren’t starting a business when you hired the coach, it was just an idea. You also weren’t starting a business when you hired the PR firm, you were already in business. Carefully record and document business startup expenses, because many of them are tax deductible.
Before deciding to write off startup costs, you will need to
verify that your specific expenses qualify, because there are some
limitations. In many cases, non-applicable expenses can be written off
under other classifications.
The most notable exceptions to the startup cost deduction include:
The initial startup deduction is capped at $5,000, or lower in some cases.
How much can you deduct in the first year? That depends on the total amount of your startup expenses, and how many months you have conducted business.
The remainder can be amortized, usually deducted equally over the first 180 months in business. This can lower your taxes for the first 15 years, but it is voluntary. Business owners also have the option of capitalizing startup expense, though amortizing them is usually a better option. Whichever option you select should be indicated on your first tax return, and it cannot be changed.
If you feel overwhelmed or uncertain about developing a tax plan for your business, don’t worry – we are here to help! Just call Whyte & Associates, Inc. at (909) 575-0080.