Tax Deductions For Startup Businesses

tax deduction

If you are planning to start a business then you must keep it in your mind that you have to deduct different expenses under the tax deduction category for your newly started business. These costs include:

  • Market research expenses
  • Marketing and advertising expenses
  • Employee training and professional fees

As per estimate you must deduct $5000 as startup expense and $5000 as organizational costs. These are the capital costs for tax purposes and according to the IRS these are considered as the long-term assets of a business.

This article covers:

What are Some Start-up Costs for a Business:

Business Startup costs refer to the expenses for starting a new business. These expenses are different for different business types. Some common types of business expenses are:

  • Hiring and training costs of employee
  • License and permit costs
  • Shipping costs
  • Technological expenses
  • Office expenses
  • office space
  • Borrowing costs
  • Marketing expenses and advertising costs
  • Office supplies and cost of equipment
  • Expenses of business property
  • Payroll taxes
  • Cleaning services
  • Interest charges
  • Insurance
  • Business Tax deduction 
  • Rent
  • Business Travel expenses
  • Utility bills
  • Expenses for legal services

Are Business Start-up Costs Tax Deductible?

IRS categorizes the start-up costs as:

  • Start-up costs
  • Organizational costs

If we talk about the start-up costs that are tax deductible, we can categorize them as:

  • Costs of creating a Business
  • Costs of Launching a Business
  • Organizational costs

Costs of creating a Business:

These include the costs of research carried out while creating a business or trade. It also includes the costs such as:

  • Market expenses 
  • Product analysis
  • Feasibility studies 
  • Visiting potential locations
  • Competitor analysis 
  • Examining the labor supply

Costs of Launching a Business:

It includes all the costs for starting a business, such as:

  • Employee hiring costs
  • Employee training costs
  • Business Consultant fees 
  • Travel costs and 
  • Advertising expenses
  • Professional fees

Organizational Costs:

organizational expenses includes the costs incurred during the first tax year in business to set up your business as a legal entity such as:

  • Accounting fees 
  • Incorporation fees 
  • Director expenses
  • State and legal fees
  • Expenses for conducting organizational meetings

On the other hand those start-up expenses that are not tax deductible are:

  • Capital expenses including the expenses of  buildings, vehicles and equipment.
  • Expenses that incurred before the business start date.
  • Expenses for starting a certain type of business, such as real estate business.

How Much Start-up Costs Can You Deduct?

As per IRS, you can deduct a start-up tax of $5000 for start-up costs and organizational costs for the first year of business operations. If your start-up costs exceed $50,000 it will lower down your tax deduction and the rest of the amount is amortized.

Related Articles:

What is overhead cost and how to calculate it?

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