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Starting a New Business? Here’s What You Can and Can’t Deduct
If you plan to use personal savings for a new business, many of the costs are tax deductible.
In this article, we’ll go through what you can and can’t deduct during the startup phase, helping you spend strategically and get a better return come tax time.
The business startup phase
Startup expenses are categorized differently from standard business expenses. Distinguishing between the two depends on when the cost is incurred.
In the eyes of the IRS, you are in the “startup phase” until you open your doors for business or start earning income. Costs during this period are categorized as startup costs.
Once you launch or make your first sale, costs are categorized as business expenses.
However, not everything can be claimed as a startup expense. First, let’s look at what you cannot deduct, and then we’ll move on to what you can deduct during the startup phase.
Here’s what you can’t deduct:
There is a limit to the amount of startup costs that can be deducted in the first year. If you incur over $50,000 in startup costs, your available deductions will be lowered by the excess amount. For example, if you incur $52,000 in startup costs, you can only deduct $3,000 in the first year ($5,000 minus the excess over $50,000).
After the first year, you can amortize the remaining costs over the next 15 years. If you exceed $55,000 in startup costs, you won’t be able to deduct any costs in the first year and must amortize all of your startup costs.
Here’s what you can deduct during the startup phase:
The total amount of costs incurred while starting your business determines the amount you can deduct as startup costs. If your startup expenses stay under $50,000, you can deduct $5,000 in startup costs during your first year.
Deductible expenses during the startup phase fall into two categories: research and the formation of the business. Let’s take a look at the specific types of startup expenses that can be claimed:
Investigating the creation or acquisition of an active trade or business
Research costs that can be deducted as startup expenses include:
- Surveying markets
- Product analysis
- Visiting potential business locations
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