As we begin to close out the year, a common question I get from first-time business owners is, “How will I deduct my start-up business cost?” Before we go into the explanation of how to report expenses, let’s first understand what the IRS calls “start-up cost.” The expenses you incur during the planning stages of your business and before the actual opening of your business are considered start-up expenses.
Something else to remember is that the IRS does not consider your business until you have collected the first dollar in business revenue, which brings me to the main point of this article:
Once you have generated revenue, you will be able to report your start-up expenses the following way: You can claim up to $5,000 in start-up costs, plus an extra $5,000 in organizational costs, as long as your expenses for that year are no more than $50,000. If your first-year expenses are more than $50,000, you will have to do a different calculation. Don’t worry – your accountant and most tax software can efficiently perform these calculations.
Start-up Business Cost
So now you know that the IRS allows you to report the first 5k, but what if you spent more than 5k to startup? Then you will have to amortize a portion of your expenses over 180 months. Here is an example: Let’s say that you spent 35k between January and July of 2019, all in preparation for your grand opening or launching your app. In August you have finally opened for business and you are now generating revenue. Based on what we learned above, the IRS will allow you to report the first 5k, and the other 30k will be deducted on your taxes over 15 years.
Now that you know the complicated parts of the start-up cost deduction, actual expenses that can be claimed include:
- Office Space
- Business Insurance
- Real Estate
- Business Cards
- Professional fees
- Business Assets
Restaurants get their own categories because of their cost and popularity.
These are the basics, and it can get more complicated as you spend more money starting out or if you operate as a partnership. Consult with a tax professional to ensure you claim your start-up cost correctly during your first year, and you can fully amortize all your expenses over time.
If you need help with your taxes, books or want to create a plan to save on taxes, schedule a free consultation with one of our experts today.