As a startup business owner, you have to be concerned about the amount of cash it takes to get your company up and running.
Most entrepreneurs are surprised by the amount of hidden expenses involved with a startup. Although it's painful, at least you have the consolation of knowing that every dime you invested in your new company can be deducted from your taxable income at the end of the year, right?
Maybe not. The IRS has specific rules and guidelines about deducting business startup expenses. Although you can deduct a portion of your startup costs in the current year, some of those expenses may need to be capitalized and deducted over a multi-year time period.
If you're in the middle of your company's critical first year of operation, it's time to start thinking about tax planning and how you will go about deducting your startup expenses at tax time.
IRS Rules & Guidelines
These days, it's much easier for entrepreneurs to deduct startup expenses than it used to be. In the past, startup business owners were required to capitalize startup expenses over a time period of at least sixty months after the business was launched. But the American Jobs Creation Act of 2004 allows business owners to deduct a large portion of their startup costs in the current year, unless the owner elects to opt out of the deduction and capitalize costs over a multiyear term.
The amount of the deduction is lesser of $5,000 or actual startup costs. The new deduction is reduced when the total startup costs exceed $50,000, but any amount that cannot be deducted in the first tax year can be capitalized and deducted over a time period of 180 months.
Startup expenses generally cover costs incurred to research the viability of a business idea as well as any expenses that occur before the company's first day of normal operations. Qualifying startup expenses include market surveys, training salaries, pre-opening publicity, executive salaries and costs associated with securing suppliers or vendors.
Costs that are normally deductible elsewhere on the return (e.g. interest, taxes, etc.) aren't classified as startup expenses and can be included as a normal business expense, especially when they are incurred after the company has opened its doors for business.