Did you start a new business in 2015 or are you planning on starting one next year? Even if all you did this year was some preliminary legwork for starting a new business next year, you may be able to claim some of the expenses on your tax forms.
A startup cost is considered a deductible if meets two tests:
- It is a cost you pay or incur before the day your active trade or business begins.
- It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).
In other words, the IRS categorizes costs associated with starting a new business as either investigative or opening a business expenses. Investigative expenses could include:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Fees for consultants or for similar professional services
Costs for opening a business include:
- 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
Purchasing equipment does not count as a “startup” expense. However, the equipment can be considered an asset, which can be depreciated and written off over time.
If you decide you want to organize your startup as a corporation, you can claim the costs associated with forming the corporation, such as any expenses involving directors, meetings, state incorporation fees and legal fees. The rules are similar if you decide to form a partnership.
If your business is related to some innovative new technology or science, your expenses may be eligible for the Research and Development Tax Credit. This credit is available for businesses of all sizes performing qualified research in a range of industries. Eligibility for the credit is not limited to basic research. It also includes all expenses related to new product development, such as wages for personnel involved with qualifying projects, supplies directly used in the R&D process, computers and software needed in the design or improvement process and hiring of outside contractors. Did you create a new software program for internal use only, such as to make running your business easier? You may also be eligible for the R&D tax credit, but check with your accountant.
As far as startup costs for your first year in business, if the costs are less than $50,000, you can deduct up to $5,000. Additional costs over $5,000 can be amortized over 15 years. You also have the option to amortize total startup costs over 15 years by taking the same deduction every year.
Try not to mix business and personal expenses in your recordkeeping. Having completely separate bank accounts is advisable, but if you have an expense that is used for both business and personal reasons, the business portion can be deducted. For example, if you start your business in your home, you can deduct some of the expenses of maintaining your home, such as a portion of utilities, mortgage and insurance. Likewise, if you use your vehicle for business, some of the repair and gas expenses can be deducted. Want to start a retirement plan and/or health care plan for your employees? You can deduct plan startup costs and more. Check the IRS website for more information.
Be sure to keep detailed records of all your purchases and expenses related to starting your business if you want to claim the deductions at tax time.