Our top five potential tax deductions for your startup

With all the hustle and bustle associated with a startup, tax deductions can be an afterthought.

That’s understandable, but sometimes a reminder can help.

So, today’s post will outline the five most common steps a startup can take and how to remain compliant.

Let’s go!

Startup Costs

You can start thinking about this one before you ever open your doors for business. That’s because it can cover costs that occur before any selling begins. These include market research, legal fees, and business formation, among others.

Up to $5,000 can be deducted in the first year, and the remaining costs can be amortized over 15 years.

However, the Internal Revenue Service places limits on this deduction. 

If your total startup costs exceed $50,000, the $5,000 first-year deduction begins to phase out. For every dollar above $50,000, your immediate deduction is reduced.

If startup costs hit $55,000 or more, you lose the upfront deduction entirely and must amortize all expenses over 15 years.

Home office deduction

Of the five deductions in this blog, the home office is one of the most difficult to take because there are so many rules.

First, your home office must be the primary place where you conduct significant business, such as meeting clients.

It also must be used exclusively for business. So, trying to deduct your dining room space because you do office paperwork there in the evenings isn’t going to fly with an IRS auditor.

If you take the deduction, there are two implementation choices.

The simple method involves capping the deduction at $1,500. It is easy, but you could be leaving money on the table.

The other method requires more work but may provide a greater deduction.

First, you must measure the total square footage of your home, including all livable areas.

Don’t include unfinished areas like basements or attics unless they are used for business.

Next, measure the square footage of the space used exclusively for your business.

Divide that by the total square footage of your home. That’s the business percentage.

Shared costs like rent, utilities, mortgage interest, property taxes, insurance, and depreciation are deductible based on the business percentage.

It’s a lot of work and requires detailed record-keeping. Still, it may be worth it, especially if your business doesn’t have many other deduction opportunities.

Business Equipment and Supplies

This is the most common tax deduction and arguably one of the most misused.

Problems arise when record keeping is poor, making it challenging to prove expenses. Other issues occur when business owners mix personal and business finances, leading to mislabeling of personal expenses as business expenses.

Incorrect depreciation of business equipment is another common problem and definitely raises red flags for the IRS.

The good news is all these can be overcome with good record keeping, separate personal and business accounts, and the help of good tax software or a tax professional.

Speaking of tax professionals, let’s discuss the next deduction.

Professional Services

Fees for accountants, lawyers, and other consultants can feel like an income drag, but you can take solace in knowing they can be deducted as ordinary business expenses.

Just be sure to retain your invoices and verify the services were directly tied to your business.

That brings us to the last deduction.

Marketing and Advertising 

Marketing expenses incurred before your business opens can usually be deducted as startup costs. This is also a reasonably simple deduction to keep taking after your business is rolling.

Any ordinary and necessary expenses, such as websites, running ads, creating branding materials, and promotional campaigns are fully deductible.

Only a few caveats exist, like lobbying for political purposes or creating ads to influence legislation. These aren’t tax deductible under any circumstances.

The Bottom Line

Most startups are focused on survival and becoming profitable, not tax deductions. Of course, these are not mutually exclusive. Becoming profitable starts with knowing where to reduce outflows, like taxes.

But it takes organization and commitment to learning. So keep your business systems tight and your eyes peeled for information on tax deductions and strategies that can take you from being a startup to being a staple in the business community.