Starting a new business can be costly, but the IRS offers a deduction for startup costs to help ease the financial burden. In this guide, we’ll cover everything you need to know about the startup cost deduction and how to take advantage of it in the future.
### What is the startup cost deduction?
The startup cost deduction allows entrepreneurs and small business owners to deduct a portion of their startup expenses from their taxable income in the year they begin conducting business.
To qualify, the business must be new, the expenses must be incurred before operations begin, and they must be necessary and ordinary for the type of business being started. The deduction is limited to $5,000 for the first year, with any remaining costs amortized over 15 years.
### Who can benefit from the startup costs deduction?
New businesses of all types and sizes can benefit from the startup cost deduction. This includes entrepreneurs who have recently started a business or are in the process of starting one.
### What startup expenses are deductible?
Deductible startup costs include expenses like research and development, market research, advertising, employee training, equipment and supplies, and professional fees. Organizational costs like legal and accounting fees, state fees, and licenses and permits can also be deducted.
### What startup expenses are not deductible?
Personal expenses, capital expenses, research and experimentation costs before operations begin, and expenses related to acquiring an existing business or issuing stock are not deductible.
### How to claim the startup costs deduction?
To claim the deduction, determine if your business is eligible, calculate your startup costs, choose between deduction or amortization, file the appropriate tax form, and include the deduction on your tax return.
### How much can be claimed with the startup costs deduction?
The deduction is limited to $5,000 in the first year, with any excess amount reducing the deduction. Remaining costs can be amortized over 180 months.
### Can an LLC deduct startup costs?
Yes, an LLC can deduct startup costs on its tax return, subject to limitations and eligibility requirements.
### Can a sole proprietor deduct startup costs?
Yes, a sole proprietor can deduct startup costs on their tax return, with limitations on the amount deductible in the first year.
### Can an independent contractor deduct startup costs?
Independent contractors can deduct startup costs on their tax returns, with similar limitations on the deduction amount.
### Can you depreciate startup costs?
Certain startup costs, like equipment purchases or property improvements, can be depreciated over time on a business owner’s tax return.
Starting a new business can be financially challenging, but taking advantage of the startup cost deduction can help alleviate some of the burden. Make sure to consult with a tax professional to ensure you are maximizing all available deductions.