Tax Deductibility of Startup Costs
Start-up expenses and organization expenses have an automatic $5K expense line and can be written off immediately. Section 162 of the tax code describes customary, ordinary, reasonable, and necessary expenses. When it comes to finding a specific list of the write-offs you can take and their categories, it always depends on what you are doing. No matter what, ask yourself, “Is this the type of expense that will benefit my business?”
Business startup costs include costs for startup and for setting up your business legal structure. These costs are part of your investment in your business, and they must be deducted over several years, using a process called amortization. You may be able to deduct up to $5,000 of startup costs and $5,000 of organization costs in your first year in business.
Official Business Activity and Deduction Limits
Start-up costs that exceed the first-year limit of $5,000 may be amortized ratably over 15 years. The amortization period starts with the month you begin operating your active trade or business.
Any startup costs that are not deducted in the current year can be amortized ratably over a 15-year period, beginning in the month you start operations. You can elect to forgo this election and make a different election to capitalize your startup costs. The costs then become part of the basis in the business and are not recovered until the business is sold or you go out of business.
You claim the deduction for start-up costs in Part V of Schedule C (“Other Expenses”). An election to amortize the excess over $5,000 is made by claiming the deduction on Form 4562, Part VI.
Legal Considerations and Additional Deductions
In addition to startup and operating costs, startup expenses can also be claimed as tax deductions. However, the IRS is strict in determining which expenses qualify as business start-up costs.
Therefore, it is advisable to consult an accountant before deducting these expenses. The expenses are eligible for business startup costs deductions as long as they occur prior to the business’s birth.
Other business startup costs deductions include legal, accounting, and business plan consulting fees. It is also a good idea to write off consulting and professional fees for starting a business.