This post was originally published on Feb. 21, 2017, and was updated on Feb. 7, 2019.
You took the plunge. You decided to start that new business and take charge of your own life. But maybe you’re a bit nervous about the money you need to spend to get your big idea off the ground. Well, take heart. Here’s what you need to know about deducting startup costs on your tax return.
Deducting startup costs: The basics
You can take a tax deduction for startup expenses. These costs include the amounts you spent to either create a business or to investigate starting or acquiring a business. For example:
- Analyzing or surveying potential markets, products, labor supply, transportation facilities, etc.
- Advertising costs letting the public know you are opening the business.
- What you pay for employee training and the cost of their instructors.
- Costs related to travel to find and sign prospective distributors, suppliers or customers.
- Amounts paid to executives and consultants, or those who provide similar professional services.
Keep in mind, however, that you will not recoup these costs in your first year of business. These costs will be amortized or spread over the life of the business. The IRS will limit your first-year startup expense amount to $5,000, with the balance of those costs being amortized.
You’re only considered in the startup mode when you are in the development and planning phase of your business.
When you’re either open for business or are conducting business transactions, the amounts you spend are considered part of the expenses of an operating business. You can deduct these costs as regular business expenses on your return.
Related: Calculating self-employment taxes
How much can you deduct for startup expenses?
So the big question is, how much can you deduct? If you started your business in 2018 and had startup costs of $50,000 or less, you are allowed to deduct up to $5,000 in startup costs for your business on your 2018 tax return.
If you exceed the $50,000 threshold, the $5,000 first-year deduction will be reduced dollar-for-dollar by the amount those startup expenses exceeded $50,000.
Further, if you spent more than $55,000 on startup expenses, you won’t be able to claim the $5,000 deduction for the first year.
How do you report startup expenses?
Now that you know what the types of costs you can deduct, and the dollar amounts you are allowed to deduct, the question remains: How do you report these expenses on your tax return?
It is fairly simple: You would claim the deduction for your startup expenses on your income tax return for the tax year in which the business began operations.
If you filed a return without making the election to deduct the expenses, you would be allowed to file an amended return within six months of the due date of the return.
Note: Clearly indicate the election on your amended return and write “Filed pursuant to section 301.9100-2.”
Need help? Talk to an accountant.
People do get nervous about starting a business because of the expenses involved with investigating whether to buy an existing company or start a new venture. The possibility of deducting startup costs might make the decision easier. Don’t be afraid to ask an accountant if you have questions about startup costs, or for guidance on starting a business.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.