Tax Deductible Start-Up Costs

You’ll incur numerous costs to get your new business venture off the ground. But are all of them tax deductible? You may be surprised.

GETTING STARTED

Tax deductible business start-up costs include those incurred while creating an active trade or business and/or investigating the creation or acquisition of an active trade or business.

Start-up cost examples include:

  • Market surveys
  • Advertising for the opening of a business
  • Deposits on utilities or leased property
  • Website development

There are also organizational costs. These include expenses for organizing your company, state incorporation fees, and attorney fees to help with any of these tasks.

IRS WEIGHS IN

It’s important to separate these two expense groups. Generally, the IRS considers business start-up costs as capital expenses because they are used for a long time, rather than within the first year of doing business. So, you can’t designate all these costs as expenses to your business in the first year.

Business start-up costs are intangible assets (no physical form), so they must be amortized (spread out over 15 years, for example), beginning with the year your business begins.

THE FIRST YEAR IS UNIQUE

You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs in the first year you are in business. But each $5,000 deduction is reduced dollar-for-dollar by the amount that your total start-up or organizational costs exceed $50,000. For example, if you incurred $53,000 of start-up or organizational costs in the first year, you could only deduct $2,000 in the first year ($5,000 – $3,000).

Keep organized records of all expenses you pay while starting your business for your tax professional.