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Starting a business can be expensive.  Did you know that it is possible to get some of that money back as a tax deduction? The Austin tax experts at Escobar & Associates would like to help you figure out how to make the most of these startup expenses.  If you are like many small business owners, you probably funded your dream of opening a business with some personal money.  Keep reading to learn about what startup costs are tax deductible during your first year in business and how much you will be able to actually deduct.

Defining Start Up Costs

The IRS defines startup costs in two categories:

  • The cost of “investigating the creation or acquisition of an active trade or business.”

Before purchasing a business or starting a new one, you will most likely engage in a long period of research and analysis.  During this phase, you can deduct expenses from surveying markets, product analysis, and visits to potential business locations.

  • The cost of getting a business ready to operate.

These costs happen before opening your doors for business or making any sales.  Costs may include employee training and wages, consultant fees, advertising, travel, and incorporation or organization fees.

Once your business is operating, these costs may no longer be considered start-up expenses.

Have you purchased equipment to get your business started?  You may have noticed that this type of expense is not listed in the two IRS defined start-up cost categories.  While equipment costs can be significant during pre-business operation, they are not considered start-up costs.  Instead, this type of expense will need to be written off through depreciation.

Defining the Start-Up Phase

When determining expenses for tax deductions, the start-up phase is defined as the period of time until you open your doors for business or start earning income from the business: the planning and development phase.   Once you have launched your business or made a sale, any costs become traditional business operating expenses.

How Much Is Actually Deductible?

If your startup expenses do not exceed $50,000 you can deduct $5,000 in costs during the first year of business.  If you do incur over $50,000 but under $55,000 that first year, then the deduction will be reduced by the amount you exceeded $50,000.  So, if you have $52,000 in startup costs, you will be eligible for a $,3000 deductions during the first year of business.  ($5,000 minus the amount your expenses exceeded $50,000).  If you exceed $55,000 in expenses, you will not be able to deduct any start-up costs during the first year of business but can amortize them instead.

It is important to keep good records from the beginning. Preparing for tax season should be a year-long effort- you will save yourself a huge headache if you keep your paperwork in order from the get-go.

The Austin tax experts at Escobar & Associates can guide you so that you take the best deductions for your business.  If you are not expecting to make a profit during your first year, it may make more sense to reduce tax liability by capitalizing or amortizing expenses instead.  We are here to help you find the best solution for your business.  Give us a call today so that we can help you on your path to successful business ownership!

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