Tweet

Deducting Start-up Costs from Your Business or Personal Taxes

Guest post by: Joseph Lizio

Article Overview: Starting a business can be expensive for new entrepreneurs. But, the good news is that these expenses both start up and organizations costs can be written off provided the business owners understands and follows the tax rules related to these costs.

Deducting Start-up Costs from Your Business or Personal Taxes

Starting a new business can be quite expensive. Not only are there costs in actually forming an organization like filing for a partnership (partnerships and LLC are usually taxed the same) or incorporating your business but other costs regarding determining the feasibility of the business and the market in which it will operate prior to opening the business's doors. The good news is that most of these expenses can be deducted or offset against future business income reducing the amount of taxes the business or owners need to pay in that very early and fragile start-up period.

Some of these expenses can be deducted in the year occurred or the year paid and others must be amortized over time and some will require a combination of both.

Most new business owners incur costs before starting their business as they explore their market and business feasibility. These costs, up to $5,000 can be deducted in the year occurred or paid. Further, additional organizational costs, like that of setting up your form of organization with your state can be deducted; again up to $5,000. But, remember, these cost can only be deducted if the business you are pursuing actually becomes a business entity or for-profit trade. Thus, if you research the possibility of a market or business endeavor but decided not to pursue it, you might not be able to deduct those costs as stated but may have to include them under different IRS and state tax rules.

According to the IRS, start-up costs include amounts paid for the following:

An analysis or survey of potential markets, products, labor supply, transportation facilities, etc., advertisements for the opening of the business, salaries and wages for employees who are being trained and their instructors, travel and other necessary costs for securing prospective distributors, suppliers, or customers and salaries and fees for executives and consultants, or for similar professional services just to name a few.

And, organizational costs include the costs of creating a corporation or partnership.

Now, should the business occur costs greater than the $5,000 limit, the remaining expenses do not have to be sunk but can be amortized over the next 180 months using a straight line calculation similar to depreciation. Simply divide the amount by 180 and deduct that amount each month until depleted.

Interesting enough, as you see from this IRS list, a business may NOT include or amortize other certain costs such as deductible interest, taxes, or research and experimental costs. These costs must be deducted in the year occurred as business operating expenses - even if the business does not have the income to offset these costs.

The goal here, especially when starting a new business and making sure that it gets started on the right foot is to understand what you can and what you cannot deduct. Then, simply ensure you follow the rules. Trying to stray outside these rules will only raise red flags with the taxing authorities and could potentially kill your business before it even gets a chance of reaching its potential.

All money that can be kept in the business will only benefit the business in the form of added capital for new business development, increased marketing reach or increasing or improving existing products and services. It is much better to keep this cash in the business than it is to just give it to the IRS or state taxing authorities if you don't have to.

I implore all business owners - especially new start-ups - to gain a basic understanding of tax laws related to their business and to them personally as business owners (not just relying on your CPA). Not only will this allow the business to avoid potentially fatal actions in running afoul of the IRS but will also allow you (the business owner) to make better business decisions as your company moves forward - for example, knowing which actions taken throughout the year that may hurt or help your tax situation thus ensuring your business does not get blindside during the following tax season.

By getting a better understanding of the expense you can and cannot write-off may even keep you out of those embarrassing television commercials where business owners had to pay large sums of money to tax attorneys just to settle large tax debts with the IRS. The bottom line is that what the business might have saved from paying the taxing authorities is probably the same amount they ended up paying for the attorney. Do yourself a favor and just avoid this situation all together!

Related Articles
  StartUp Costs
  Finance Start-Up
  Home Based Business Tax Incentives
  Breakeven Analysis
  Taxes The Good News and the Bad News For Increasing Business Productivity
  Passive-Aggressive Behavior Is Useless In A Startup
  Audits: Always Be Prepared
  What do you need to consider when starting your own business?
  Income Made and Taxes Paid by the Rich
  Why everyone should be taking advantage of Home based business tax incentives
  Self-Coaching Tip: Enjoy Doing Your Taxes
  How to Calculate Small Business Startup Costs
  How much Taxes are You Willing to Pay ?
  Over 65 Exemption Portability
  Trust Fund Taxes First
  Low Investment Franchise Opportunities
  Small Business Taxes In The US
  Fantastic Post By Calacanis On How To Get PR
  Equipment Leasing- Types and Advantages
  The Startup Visa Act of 2011

Article Tags: business, deductions, expenses, startup costs, taxes



Related Forum Posts
Re: Twitter vs Facebook - I know this is a naive question but i'm really not sure: What do you tweet ? Business? promote your business? Personal? Are there things you can't do? ALSO :Is there a rule book? Is there a success formula using twitter?
Re: New Year - New Resolutions? - Business goal: To not procrastinate and to take action on my plans. Personal goal: To be more physically active as sitting on the computer all day isn't good for you.
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Re: Twitter vs Facebook - [quote="barrysarner":ejpeof1u]I know this is a naive question but i'm really not sure: What do you tweet ? Business? promote your business? Personal? Are there things you can't do? ALSO :Is there a rule book? Is there a success formula using twitter?[/quote:ejpeof1u] I do a mixture of business tips, personal updates, success quotes, retweets, questions, promoting, etc... It just depends on what's on my mind right then. I don't think there's anything you can't do. I've seen everything on there. But I suppose there probably are some rules. Spamming is obviously frowned upon.
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Are You Too Good for Your Job?

Coaching Tip: Identify Your Core Values

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.