Taxes are one of many concerns people have when starting a business.
Everyone is interested in ways to reduce costs and maximize profits, which is why knowledge in tax write-offs and deductions are highly beneficial and a great strategy for when tax season rolls around.
Unavoidably, there are many expenses associated with starting a business, and the IRS has rules as to what can and cannot be deducted from your taxes.
Tax deductions to consider when starting a business:
- Allowable Deductions
- Amortization and Tax Deductions
- Startup Cost Worksheet
The IRS doesn’t specify what exactly is deductible, however it does say that the expense must be ordinary and necessary. Business startup costs are not to be confused with categories like capital expenses, personal expenses and costs of goods sold.
There are three different categories where new business owners can write off their expenses.
- Creating the Business: conducting market research, scouting locations
- Launching the business: training employees, marketing expenses
- Business Organization: registering your business structure (LLC, Corporation, etc).
Associated Startup Costs
There are various costs that come with starting a business. It is important to understand what type of expenses are associated with each category mentioned above. Cost examples include: market research costs, travel for visiting the location where the new business will be established, feasibility studies etc.
Things a new business might need:
- Office space
- Office supplies
- Business assets (Intellectual Property)
- Permits and Licenses
- Advertising and marketing
For the first year of operations, the IRS allows up to a $5,000 deduction for start-up and organizational costs, but only if your total startup costs are equal or less than $50,000.
Setting up your business as a legal entity has implied costs like registration fees with the state and federal governments. These costs can be deducted for up to $5,000 in the first year. Costs associated with the organization of the business can also include legal fees, accounting fees and temporary salaries.
Amortization and Tax Deductions
Amortization is a tax and accounting practice that is used to spread the cost of an intangible asset, such as intellectual property and organizational costs, over the asset’s useful life span. This term can be regularly confused with depreciation; however they don’t mean the same. Depreciation is used to calculate the value of a fixed asset over its useful lifetime, as fixed assets get old and used. Examples of fixed, tangible assets are buildings, machines, land, and vehicles. Put simply, depreciation is commonly used on tangible assets (equipment) and amortization is used on intangible assets (patents, trademarks etc).
Amortization can be used in two different ways:
- The first is to spread costs out over a period of time. Amortization expenses should be calculated for each year and can then be deducted from your taxable income. In this case, you can calculate an intangible asset’s useful life and spread out the expenses over how long the asset will be useful to you.
- Secondly, amortization is commonly used with loan payments. For example, amortization lowers the book value of a loan over time because you are constantly paying it back. Both uses of amortization can be used by a new business owner to amortize or allocate startup expenses over a period of time and lower taxes.
Keeping Track of It All
Starting a new business and all its costs and implications can be overwhelming!
The best way to stay organized is to keep track of the expenses with a startup costs worksheet.
This will not only help you track your expenses but will also help you financially prepare for what is to come. Furthermore, doing this will help you identify the expenses that apply for tax deductions.
Create a worksheet where you have all the categories of supplies needed to get your business up and running, such as equipment, machinery, office space, office supplies, etc. Creating Pro Forma statements will also help you plan and budget for the future.
Here is an example of a Startup Costs Worksheet:
This can be entirely customizable to your business and numbers are random and not reflective of actual costs.
|Facilities Costs (Office Space)|
|Office space (monthly)||$1,000.00|
|Other costs (Taxes and fees)||750.00|
|Total Facility Costs||$5,450.00|
|Equipment for shipping and manufacturing||10,000.00|
|Computers, software etc||5,000.00|
|Vehicles for Delivery||20,000.00|
|Total Equipment Costs||$50,000.00|
|Supplies for manufacturing activities||3,000.00|
|Supplies for shipping and mailing||1,000.00|
|Advertising materials (flyers, brochures etc)||200.00|
|Total Business Supplies||$5,600.00|
|Ad Campaign costs||1,000.00|
|Total Advertising Costs||$2,200.00|
|Legal Fees for Business Registration||$250.00|
|CPA Fees for an accountant of bookeeping system (quickbooks)||1,000.00|
|Total Other Costs||$11,850.00|
|Total StartUp Costs||$75,100.00|
See a Tax Professional
Lasty, when it comes to taxes, the easiest way to make sure you are doing it correctly and minimizing taxable income is to seek help from a tax professional! Doing the work before meeting with a specialist will facilitate the process and help you better understand your financial situation and obligations.
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About Raitchele Cornett
Raitchele (Hi-Chel-Ee) is from Curitba, Brazil, and grew up around entrepreneurs and business moguls.
Raitchele is a Boise State Alum and MBA Student with a passion for entrepreneurship.
This site does not provide legal or tax advice, and is for informational purposes only. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute an attorney-client relationship. The information contained on this site should not be seen as legal advice. Consult with an attorney or tax professional for all legal and tax advice.