Starting a business always comes with a flourish of optimism and ambition. Startups have access to assorted tax credits and incentives that may not be available to larger businesses. One notable incentive is a deduction for start-up and organization expenditures that owners can utilize as they set the foundations for their business dreams.
Starting Deduction
Taxpayers are able to deduct up to $5,000 of accumulated start-up expenditures in the tax year that the business begins. To qualify, the expenditures must meet two requirements:
- A cost that the business could deduct if they paid or incurred it to operate as an active trade or business, in the same field that the business entered into.
- A cost that a business pays or incurs before the day their business begins.
Startup expenses such as incorporation expenses, advertisements for the opening of the business, and travel necessary to secure distributors, suppliers, or customers, are all qualified to be included in this startup deduction, up to the $5,000 limit. Phase out rules apply of course. The $5,000 limit begins to phase out at $50k of total startup expenses and is entirely phased out once total expenditures exceed $55,000.
Any other startup expenditures not deductible in the year the business started may be evenly amortized over a 180 month (12 year) period beginning from the start date of the business. Additionally, taxpayers may elect to capitalize all startup expenditures and not claim the $5,000 deduction.
The $5,000 deduction is claimed in the “other deductions” line of the taxpayer’s Form 1040 Income tax return. Amortization of the startup expenditures in excess of the $5,000 is claimed on part IV of Form 4562. A requirement to claim the deduction is that the business must be actively in business and not “merely an investment”.
A deduction for start-up expenses is just one of many incentives small and emerging business can utilize as they take the steps forward to see their ambitions and business goals come to fruition. Owners focus entirely on doing all that is necessary to get their businesses running in these early stages. Having some additional support, such as a trusted accounting affiliate, during the early stages of the business can help integrate good practices, such as accurate recordkeeping, that can benefit the business as it grows down the road. MiklosCPA has been a trusted accounting affiliate for many small and emerging businesses over the years. Set up a chat with us and learn how we can help your startup or small business. Also, like, follow, and subscribe to our social media pages. We periodically post assorted accounting and other “good-to-know” articles for individuals and businesses.