Starting a business isn’t cheap, but every penny is an investment for your future. If you are in the process of starting a new business, you may be eligible for certain tax deductions based on the expenses of your startup. We’ll look at the costs of starting a new business, what is tax-deductible, and how you can claim those deductions.
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What Are the Costs of Starting a Business?
Before you begin selling your services or products to clients, there will be plenty of costs you’ll need to keep in mind. Starting a successful business requires a lot of thought, planning, and willpower.
If you want your business to get off to a strong start, you’ll have to:
- Make a business plan
- Make qualified research expenses
- Make reports
- Invest in marketing
- Interview and recruit
Also, depending on your industry, you’ll have different challenges and startup costs to consider, like:
- Accounting costs
- Business licenses
- Equipment leases
- Payroll taxes
- Incorporation fees
- Lease or rental fees
- Office equipment
- Renovation costs
- Legal fees
Remember that one-time purchases, hard costs, and prime costs will vary significantly depending on your industry. But, if you make a good business plan and learn what you can and can‘t deduct from your taxes, you can turn this overwhelming process into a slightly more simple one.
Amortizing and Deducting Startup Expenses
The IRS sees business startup costs as capital expenses if they are used for more than one year. This means that you can‘t treat any of these costs as an expense for your business in your startup’s first year.
Since many startup costs are intangible assets, they must be amortized within the first year your business begins.
If you are already familiar with straight-line depreciation, then you probably know about amortization—it’s a method accountants use to deduct the costs of a fixed asset over a set period.
Once you know everything that you can deduct, add them up, divide the remainder by the number of months in your set period, and deduct that amount each month over the specified time.
First Year Deduction Payments
When you first start a business, many of your initial expenses are tax-deductible. As long as the costs fit the IRS‘s criteria of allowable expenses, they should be eligible.
It is pretty standard for most business owners to incur costs on inventory. Typical expenses include preparing for initial sales, logo customization, testing labels, getting product samples, etc.
Building your product inventory and testing your products is essential for any startup business planning to sell tangible goods.
The following types of costs are typically tax-deductible:
- Competitor analysis
- Labor studies
- Market research
- Product analysis and testing
- Feasibility studies
- Location scouting
Costs Related to Starting Your Business
Many costs related to starting your business can be tax-deductible.
Costs of Property
Whether you plan on renting or buying an office space, there will likely be costs related to finding the right workspace.
According to the IRS, if you are working from home, you can designate one room as your office or workspace and deduct the square footage of that room as a percentage of your home’s total square footage. However, this office must only get used for work purposes.
Transportation (Cars, Motorcycles)
If you have any vehicles that you use for business-related ventures, some of the related expenses (gas, maintenance, etc.) can be tax-deductible. The vehicle needs to be used for business purposes only. Your accountant can help you determine if your vehicle is an allowable tax expense.
Business Travel Costs
Any travel you do for business can be considered an expense. For this reason, it‘s crucial that you save any receipts and bills for things like gas, maintenance, repairs, lodging, etc.
Most state and federal laws require individuals to have certain organizational and legal filings. Before you begin to sell your products or provide your services, it’s essential to ensure that you’ve obtained any necessary permits so that your business can legally operate.
If you own any physical assets, inventory, or property, then you will need insurance for your business. Depending on the coverage you need, this can be a large or small expense, but it is still an important part of starting up any business.
Your insurance premiums for your business are typically tax-deductible.
Advertising can be one of the largest expenses for any new business. Business promotion often includes digital marketing, sponsorship, signage, business cards, flyers, and more.
In today’s business world, social media marketing is prevalent, too. Since this is a work-related operation, you can add the time an employee spends setting up and using social media and ad accounts.
Running a business website means paying for things like domains, security, hosting, etc. If you are hiring a developer team or any other type of professional to take care of your company’s website, that can be a tax-deductible expense, too.
What Business Startups Can’t Deduct
Costs that you can‘t amortize or deduct for business startups include:
- Costs for trying to buy an existing business.
- Experimental costs
- Interest & taxes
It’s important to talk to your accountant about what you can and can’t deduct for your new business, as these deductions change based on how your business operates.
Can These Costs Be Deducted If I Don’t Go Into Business?
You won‘t receive the benefits of tax deductions if your startup business is not yet open.
Once your business is open, you will be able to deduct all the startup expenses that you didn‘t get to previously, regardless of when you incurred those expenses.
Keeping a log of all your expenses and paying all of your costs on time will make your startup experience go much more smoothly. Parachor Consulting is here if you have any questions about tax deductions for your business.
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