Tax Deductions Available When Starting a New Business
The uncertainty of the past couple of years have caused many people to rethink their job situation. Some people have decided to quit working for someone else and have launched a new business, even in the midst of a pandemic. Going out on your own can incur a lot of expenses, so it’s important to understand when those costs can be claimed for tax purposes.
Startup costs can be deducted on your income tax return for the tax year in which your business is up and running and earning income. You can deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs, but those deductions are reduced by the amount that costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis beginning with the month in which you begin operating your business.
Deductible costs include these categories:
- Expenses incurred in investigating the creation or acquisition of an active trade or business
- Organizational costs required to create a corporation or partnership, such as legal and accounting fees, governmental filing fees, etc.
- Expenses engaged in in anticipation of that activity becoming an active for-profit business
In order to be deductible as startup costs, the type of expense must be consistent with those that would be deductible for an ongoing business.
Examples of tax-deductible startup costs include:
- Analyzing potential markets, products, labor supply, logistics, etc.
- Marketing and advertising expenses
- Wages for employees receive training and instructor expenses
- Travel costs for visiting potential vendors or customers
- Salaries for executives
- Fees for professional services including consultants
- Costs incurred in a general search or preliminary investigation regarding the purchase of an existing business
However, these expenses cannot be deducted as startup costs:
- Interest
- Taxes
- Research and experimental costs
- Costs incurred in an attempt to purchase a specific business (these are capital expenses that cannot be amortized)
- Costs for issuing and selling stock or securities
- Costs associated with the transfer of assets to the new business
The beginning of a new enterprise is an exciting time. It’s important to maintain good records while in the midst of the process. Visit with your Mize tax professional for more information.
