So you are starting a business? I bet you’ve spent some money on getting it up and running and are wondering if and when you can deduct those expenses even though you haven’t officially opened your doors yet. The answer is probably. There are two categories where you can write off expenses you’ve incurred. Startup costs and organizational costs.
Keep in mind, you can’t start taking the deductions until you open for business, but make sure to keep track of what you are spending so you can write them off when the time comes!
1. STARTUP COSTS
Depending on the type of business you have, the expenses may vary, but startup costs can be things like:
- Logo design
- Business cards
- Web hosting
- Domain registration fees
- Research expenses
- Insurance, licenses, permits
- Advertising & promotion
- Borrowing costs for financing
- Employee expenses
- Training expenses
How much can you deduct?
You can deduct up to $5,000 of start up expenses when you are ready to start taking customers or clients. For example, if you incurred expenses in 2016 but don’t open for business until 2017, then you will take the expenses in 2017.
If you have more start up expenses than $5,000, the amount over $5,000 gets amortized (spread out) over 15 years. You will get a tax deduction each year for 15 years. If your total startup costs are over $50,000, then the $5,000 first year deduction begins to phase out.
**CAUTION: Money spent to qualify to get into a new business or profession does not count as a start up cost. For example, costs incurred to get a real estate license, (which has an unlimited duration as long as you pay fees and get continuing education) aren’t qualified start up costs. However, other than getting yourself qualified for the new profession or trade or business, any monies spent on investigating these business would be a qualified start-up expenses.**
2. ORGANIZATIONAL EXPENSES
You can also deduct up to $5,000 of ORGANIZATIONAL expenses. These expenses are common if you set up a corporation, s corporation, partnership or LLC. Any amount over $5,000 gets amortized just like with startup expenses. Organizational expenses are things like:
- Legal fees to create a company
- Accounting fees
- Fees paid to your state to organize your business
I hope this answers any lingering questions you had about writing off your startup or organizational expenses. Make sure you are keeping good records, check out this post where I discuss record keeping and this post where I give examples on how to stay organized.