Tax-Deductible Startup Expenses

Starting a business is costly, but some of your startup expenses are tax deductible. Make sure you don’t miss out on any tax savings by finding out which of those expenses you can write off. 

Did you start a business last year? Here are deductions you may be entitled to for your startup expenses. (Please note: Be sure to check with your accountant to verify all deductions and to identify things you might otherwise overlook.)

You’ve probably heard that one of the many benefits of owning your own business is the tips to succeed as a freelancer associated with business ownership. But what are those deductions, and which affect you? The IRS distinguishes between the expenses you incur before you actually open the business and the expenses you have once you are in business.  

What expenses for starting a business are deductible?

The costs you incur to start your business are considered capital expenses. Startup expenses are a subset of capital expenses; they’re the expenses you have before you’re ready to accept customers. While most capital expenses are not deductible, under current IRS rules, you can elect to deduct up to a total of $5,000 in business startup expenses and business organizational expenses in the year your business launches, provided your startup expenses are $50,000 or less. The $5,000 deduction is reduced by the amount your startup expenses or organizational expenses exceed $50,000.

Any startup or organizational costs in excess of the $5,000 can be amortized (deducted in equal installments) over a period of 180 months.

There may be additional rules that affect your business, so be sure to consult with a professional tax advisor while you’re planning your business, particularly if you’ll be investing a significant amount of money. Tax laws are complicated, and some decisions are irreversible.  

From a tax standpoint, when does your business actually begin?

You can be in business as soon as you’re ready to accept customers. You don’t have to wait until you’ve made your first sale. The actual event that triggers you being in business (as opposed to starting a business) will vary by the type of business and your own personal way of operating.

Something as simple as handing out how to design business cards or setting up a website or social media business page can all signal that you are “open” and ready to accept business. Once you’re actually in business, the expenses you incur would be considered regular business expenses, not startup expenses.

What expenses can I deduct?

A product or service purchased for use by your business can be deductible if it’s ordinary and reasonable for the type of business you run. Small businesses and Schedule C filers will generally find their deductions fall into the following broad categories:

• Deductible business expenses
• Depreciable business property (See Publication 946, How to Depreciate Property)
• The home office deduction
• Business use of vehicle expenses
• Cost of goods sold (if you are a manufacturer or carry inventory)

Using tax preparation software can help you find the deductions you’re entitled to. Also, tracking your expenses so that you can deduct them is easy with a tool like the ZenBusiness Money app. With a few simple clicks, you can track, categorize, and manage all of your business expenses.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.