What Tax Deductions Can Your Startup Take?

Tax time is almost here, and every deduction counts. If you started your business in 2016, you could benefit from some startup business tax deductions. Here’s a quick rundown of what you need to know.

To be considered a startup expense, the expense must fall into one of three categories:

  1. Investigative expenses: Generally, according to the IRS, these include research-related expenses, such as the cost of market research, conducting market surveys, conducting background checks on prospective employees or doing due diligence on a business you’re thinking about buying.
  2. Opening expenses: These are expenses related to actually opening the business, such as marketing and advertising costs, the cost of providing training for new employees, traveling to a tradeshow to find suppliers, or having your website designed.
  3. Organizational expenses: If you incorporated your business, formed an LLC or partnership, or chose any other form of business that required filing legal documents, you can deduct the costs of setting up your chosen form of business. That might include attorneys’ fees, filing fees and the cost of any Board of Directors’ meetings, for example.

Other possible deductions include:

  1. Automotive expenses: Did you maintain a log of mileage driven while starting your business? You can take the standard mileage deduction (for 2016, 54 cents per mile) for all trips that were taken for business-related reasons, such as to purchase equipment, visit potential customers or attend conferences.
  2. Research and development (R&D): If your startup is based on a technological or scientific innovation, you might be eligible to take the R&D expenditure tax credit. This credit can be taken for expenses related to developing a product, such as applying for a patent.
  3. Home office deduction: If you run your startup from your home, you may be able to take a home office deduction for a percentage of the costs of your home, including your mortgage or rent, home maintenance and utilities.

Things you can't deduct

Equipment purchased for your startup can’t be used as a startup deduction; instead, you need to depreciate the equipment over time. Nor can you deduct inventory purchased before you opened your doors.

Allowable deductions

If your startup costs do not exceed $50,000, you can deduct up to $5,000 in startup expenses, plus an additional $5,000 in organizational expenses for the costs of forming a corporation, LLC or partnership. Your allowable deduction is reduced by the amount by which your total startup costs exceed $50,000. For instance, if your total startup costs were $52,000, you can only deduct $3,000 in startup expenses ($5,000 – $2,000). Did you have more than $5,000 in startup costs? Not to worry: You can amortize those costs and deduct them on future tax returns.

Deducting startup expenses can be complicated, so be sure to talk to your accountant about the best way to handle these deductions.

This post is not intended to substitute for legal or accounting advice. Please consult your own legal and financial counsel for specific guidance.