There can be no more exciting a time than to go from punching a clock to being your own boss. But starting a business means more than deductible lunch dates and setting your own hours. If you think self-employment means you get to kick back and relax, it won’t happen. Most entrepreneurs will tell you they have never worked harder.
Starting a new business takes time and money. If you do nothing else, begin with a business plan. Your investment of blood, sweat, and tears can pay off for the life of your business—as long as you make prudent choices, and a business plan will help you calculate what you’ll need and how much it will cost.
The money you invest is tax deductible, right?
Well … not always.
Don’t make the mistake of assuming all your startup costs are deductible. As long as your total startup costs are $50,000 or less, the IRS allows you to deduct a limited amount of startup costs, and also organizational costs.
On the other hand, if your startup costs for either area exceed $50,000, your allowable deductions are reduced by that dollar amount. Once you make your first sale, however, you can claim all of your business startup expenses. Read on for details.
What Are Startup Expenses?
These days no business can operate without using some form of technology. Unless you plan to use your 3-year-old laptop to run your online business, you’re going to need to purchase equipment to help facilitate your business. Oh, and you’ll need a smartphone if you want to keep up.
Of course, computers and office equipment would qualify as startup expenses. If you need to rent office space or even a cubicle in a cooperative setting, they would also qualify. However, shelf any plans to stand by the mailbox waiting for your hefty check from the IRS. Neither of these expenses can be deducted until after your first sale, at which time they will be deducted over a period of 15 years.
You can choose to deduct the first $5,000 in your first year of business for startup costs and another $5,000 for organizational costs. Expenses such as legal fees, corporate filing, DBA, and related expenses fall under this designation, but only if your total startup costs are $50,000 or less. If your expenses were over $55,000 you lose the right to any deduction at all.
Make sure you save all receipts for purchases. The laws change so it’s in your best interest to be aware. Check with your tax professional, who will be aware of the latest IRS tax laws. He or she will advise as to whether your startup expenses qualify for deduction.
Request your free consultation today by calling Paradigm Tax Consulting at 925-240-2886. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.