Start-Up Costs You Can Write Off on Your Taxes

A DIY guide to claiming deductible startup costs

It takes time, energy and money to start a business. And while your enthusiasm for creating something new is there, the financial reality of early expenses can be downright terrifying. Fortunately, however, a lot of the costs you’ll incur prior to your operation getting up and running may be deductible or at least amortizable, which will help ease the tax pain on bringing your new business into the world. This guide covers popular startup cost deductions, their general mechanics and tips for documenting and claiming them.

What counts as startup costs?

Start-up costs are the regular and ordinary expenses of investigating or creating an active trade or business, or conducting a small business before it becomes active. Examples of these are market research, business planning, visits to suppliers or customers away from your normal place of base, the advertising for and purchase of initial customers (when first trying to trade), professional fees relating to the company’s formation (such as legal or accounting fees) and costs concerning investigating an occupation location.

Immediate deduction vs. amortization

Two methods of costing start-ups: immediate deduction up to a threshold, and amortization over time. The immediate deduction enables you to write off a part of qualifying startup expenses in the year that your business opens for business, cutting taxable income immediately. Costs in excess of the immediate deduction limit usually are capitalized, that is, written off or deducted ratably (proportionally) over a span of years.

Common deductible startup costs

— Market research and feasibility studies: These activities to help you figure out if and how to start a business — i.e., customer surveys, competitive research, industry analysis are typically deductible as startup expenses.

— Advertising and promotional expenses: These include costs to start a marketing program, establish a brand identity or develop a website even before operations have begun, and they can be deductible startup expenses.

— Professional fees: Legal or accounting fees directly tied to establishing the business, creating contracts or getting licenses generally count as startup costs.

— Travel and transportation: Expensing travel to visit potential suppliers, partners or customers while evaluating a new business opportunity might be deductible if well documented.

— Employee training and hiring: Training your employees or locating initial workers before you are ready to do business counts as startup costs.

— Supplies and equipment (limited): Smaller purchases such as supplies you purchase to start the business may be deductible, but larger capital items frequently need to be capitalized and depreciated under a separate set of rules.

What qualifies as not a start up cost

Some expenses are excluded from being considered startup expenses and are also treated differently for tax purposes. It is only certain one-off costs which are incurred in a business that do not fit the general pattern of taxable and non-taxable receipts and expenses – such as purchasing stock for resale, major capital expenditure on equipment or premises, or costs associated directly with acquiring an existing business – which have their own tax treatment under special rules -capitalisation and depreciation (or special base cost adjustments in the context of acquisitions).

How to record startup cost write-offs

Good recordkeeping is essential. Save receipts, invoices, contracts, bank statements and a clear description of what each expense was for. Sort your startup costs into categories like research, advertising, professional services and travel so that you can consolidate total amounts when preparing your return. Keep track of dates and why you spent the money, so that you can provide contemporaneous documentation rather than trying to recreate it after the fact.

Practical steps for claiming deductions

Find out your business starting date: The year you start in business matters. Costs you incur after you begin your active trade or business are normal start-up costs, or operating expenses and not pre-opening costs.

Distinguish between startup costs and capital investments: If your cost will benefit you over a number of years, try to capitalize it (not elbow the traditional deduction for start-up expenses off the cliff).

Work out the immediate deduction you can claim: You may be entitled to an immediate deduction for a portion of your initial costs in the first income year. Total up the eligible expenses so you have an idea of how much might be deductible in advance.

If necessary, amortize the balance: If there are left over expensing costs for which a deduction is not allowed, then the costs should be amortized over time. Spread the remaining $20 evenly over the 5 months or years and take a yearly amortizing deduction.

Report accurately on your tax return: The startup cost deductions and amortization should be reported using the correct lines and schedules for the proper tax form. Proper classification and record keeping will help facilitate preparing returns and resisting questioning.

Recordkeeping and organization tips

— Have a separate business account and credit card to simplify expense tracking. This allows you to keep track of personal and business expenses separately, while providing simple proof for deductions.

— Keep a startup expenses log Date: the date of purchaseThe merchant: the merchant, name of store or personAmount; Amount purchased and expense categoryBusiness purpose/product; Business purpose. Simply scan your receipts or take a digital picture and attach to your expenses using AbanQ.

— Classify expenses consistently: Use the same categories throughout your records to prevent confusion at tax time.

— Hold on to records for a few years: Keeping documentation for a decent amount of time often up to the statute of limitations on tax returns, if not longer will be useful should you need to prove your claims.

When to hire a tax pro

Basic rules about deductions for startup costs are simple, but how those rules apply in various situations depends on the nature of the expense and the structure of your business. If you’re not sure whether a specific cost is deductible all at one time, if it needs to be “amortized” or over a number of years or if it should be capitalized (spread out and written off each year with depreciation), seeking advice from professionals could prevent costly mistakes while gaining you the best tax outcome. They can also help you map expenses to the proper tax forms and report them correctly.

Final thoughts

Knowing which costs you can deduct as startup expenses can lessen the bite of that first tax bill and improve your cash flow during a crucial time. With the right understanding of what is offsettable, good records and use if immediate write-offs and apportionment you can receive the tax relief that you should be entitled to. Staying organized and documenting as much detail about your business from an early stage will keep executing the process easier and get you out of admin-land more quickly.