A Complete Guide On Tax Deduction for Startup Businesses

Being your own boss and earning a living by doing what you love is a dream that most people aspire to accomplish. So, starting your own business is bound to be an exciting new journey.

However, the costs associated with going out on your own can prove to be a hurdle. Lucky for you, the Internal Revenue Service (IRS) cuts business owners a bit of a break when it comes to taxes.

Here, we have attempted to sum up some of the top business startup costs tax deduction you can claim for your start-up:

Tax deductions for start-up businesses

Startup expenses can be expensive, but the good news is that you can deduct most of these costs to reduce your taxes. Since all businesses vary, the start-up costs are usually different. However, some of the common startup cost deductions include:

Advertising & Promotion

Launching your business requires you to promote and advertise your product and service out in the market, on social media platforms, on websites, etc. All of this can be pretty expensive, however, you can easily write it off.

Car & Mileage

Even if you operate your business remotely, you must’ve logged a few miles in your car traveling to investor meetings or banks. You can deduct your car and mileage expenses. If you write off a percentage of your total vehicle expenses. You can deduct parking and toll fees as well.

Bank Fees

Bank, credit card, or loan fees, any of the charges associated with your business bank account are deductible.

Merchant Processing Fees

Any fee associated with processing credit cards is deductible. This also includes fees incurred using services such as PayPal, Stripe, Square, and others

Licenses & Permits

The cost of all the licenses and permits associated with your business is fully deductible.

Commissions

Any commissions you pay to an affiliate or partner to promote your product or service are deductible.

Education

Startups, generally, tech startups are known for ongoing learning and training. Any work-related reference materials or online training program is deductible.

Equipment

Equipment purchases are deductible. However, it is crucial to figure out whether the equipment will be taken as an expense and deducted in one tax year, or it will be taken as an asset and depreciated over several years.

Furniture

Furniture can either be written off or depreciated, just as equipment.

Events

Any expense related to those business events can be written off. This includes catering fees, venue rentals, and entertainment costs such as hiring a speaker.

Insurance

You are eligible to write off the cost of any insurance you’ve claimed to protect your startup. You can write off the cost of insurance for general liability coverage, commercial property, cyber liability, or loss of income. It is a very beneficial startup cost deduction.

Interest Expenses

If you took a loan to establish your business, you can write off the finance charges and business loan interest.

Business Meal Expenses

Any meals consumed with employees, while traveling, during work shifts, or with business clients, are considered a business meal deduction.

Payroll Expenses

You can deduct the payroll expenses such as service fees paid to the provider you use, workers’ compensation insurance, and local, state, and federal payroll taxes.

Professional Fees

Any legal, financial, or professional consultations for your business are deductible.

Office Supplies

You can also deduct basic office supplies such as pens, paper, printer ink, etc.

Rent, Repair & Maintenance

Any rent you pay for your office space or co-working space is deductible. Similarly, any repair or maintenance services for your office space are deductible.

Utilities

Utility bills such as heat, water, garbage, security systems, internet, and etc, are deductible.

Travel

As long as your trip is for a business purpose, you can write off most travel expenses. This means you can deduct airfare, ground transportation, and lodging.

Salaries & Benefits

All wages, bonuses, and benefits (ie. health insurance) that you offer your employees are deductible.

Cost of Goods Sold (COGS)

Cost of Goods Sold is an expense that you incur as a seller in the process of manufacturing or selling an item. In the case of tech startups, what’s being sold is usually virtual. In this case, COGS is directly related to the application or product you’re selling, rather than your operational costs. For instance, COGS could include software hosting costs.

Home Office Deductions

As a new start-up, you may not have a dedicated office space, wherein, you may spend a lot of time working from home. Here, you can deduct your home office expenses as long as you use a designated space in your home regularly and exclusively for work. You can then write off a percentage of your rent, utilities, and any repairs to your home office.

What sort of start-up expenses aren’t deductible?

There are a variety of start-up expenses you can deduct, however, some of the start-up expenses aren’t deductible. These include:

• Capital expenses (buildings, vehicles, and equipment).
• Expenses incurred before the onset of the business.
• Expenses incurred for entering a certain type of business, such as real estate, are not deductible as start-up costs.

When should you claim the tax deduction for a startup business?

If you set up your business (partnership or corporation) before the end of your first year in business, you can deduct all the start-up expenses such as the legal fees, salaries for temporary directors, state organization fees and organizational meetings.

Common tax tips for Startup Business Tax in the USA

If you choose to organize as a partnership or a corporation, you must incur these expenses before you can go into business. If you’re not really sure which of your costs qualify, FlyFin will walk you through all your deductible business expenses.

Here are some tax tips for start-up businesses in the USA:

• As a business owner, make sure your business income and expenses come out of the business account and not your personal account. The business account must be solely used for business expenses, and no personal charges or withdrawals should occur.
• The tax code is confusing. Thus, it is always a smart idea to bring a CPA or a tax professional onto your team as early as possible to get a handle on your finances and taxes.
• Keep a record of your start-up business expenses and claim a start-up costs deduction for the same.
• Not filing or paying taxes related to the payroll is a federal crime. So, always pay your state and federal payroll taxes in a timely manner, within three days of issuing payroll checks

How to record start-up expenses?

Recording your startup expenses can be a complex process. You can either spend your time keeping a track of your receipts and bills by noting them down on a spreadsheet or you can use expense trackers like FlyFin.
The app is powered by A.I. which helps you automate your expenses and regularly classifies them as deductions based on your profession. A.I. finds start-up costs tax deductions every time an expense occurs.

Conclusion

The IRS offers business owners a bit of a break when it comes to taxes. Generally, for the first year, business owners can claim a start-up costs tax deduction of $5,000 for start-up costs and organizational costs.

However, taking the start-up cost deduction in the first year doesn’t necessarily make financial sense. For example, if it’s likely that you will be incurring losses for the first few years in your business, you might be better off amortizing the deductions over a few years. This way, you would be able to balance out your eventual anticipated profits.

Doing this requires you to file IRS Form 4562 along with the tax return of the first year. You can amortize organizational costs and qualified startup and they don’t need to be in the same amortization period necessarily. However, don't forget that you will not be allowed to change once you are done choosing the periods for each deduction. Make sure you get in touch with a tax adviser before taking this critical decision.

Deducting business startup expenses is not as simple as writing off business expenses. This is specifically true once your business is underway. So, when it comes to calculating your business startup costs tax deduction, you can either seek help from a CPA or use FlyFin. The app is powered by A.I. and backed by an expert team of CPAs.

FlyFin’s A.I. finds all the possible tax deductions for its users. Additionally, the users have access to the expertise of the company’s full-time tax CPAs, who review each individual’s tax information to ensure 100% accuracy. In addition, the CPA team also provides a comprehensive tax report along with full audit insurance for subscribers opting for standard and premium plans.

You might be feeling a little intimidated looking over the ins and outs of startup costs. No wonder there’s a lot that is required to come up with a startup, but look at it as an investment. Startups offer an unprecedented amount of freedom as well.

To be sorted during the tax season, keep a track of what is required for your startup, keep all the documents and receipts from business purchases, and stay organized. Stay at top of your start-up expenses with FlyFin’s tax deduction calculator.