Hello Mpsaeta,
Congratulations on starting your own business!
This is ceretainly a great accoplishment, however, it comes with a lot of new things to learn, especially when it comes to record keeping and taxes. This means you will need to do a little homework, as such, I have provided some additional links to resources below my response, that you may find useful.
Some of the key things a new business owner, like yourself, will need to focus on when it comes to taxation, is to understand the various start up cost and expenses and the ways they will be applied i terms of your Schedule C.
Startup tax deductions are capital costs
- Startup costs are deductible. Startup costs can be anything from market research, analysis, legal fees, to establishing suppliers and vendors.
Most of your startup expenses are treated as capital costs for tax purposes. The IRS considers them long-term assets—you’re investing in the future of your business. As assets, generally you must depreciate them rather than deduct their cost in the year they’re purchased. This means you can recover the expense stretched out over multiple years. The exact number of years you can take a depreciation deduction depends on the nature of each asset. For example, software is depreciated over three years, but if it comes already installed in your new computer, it’s depreciated over five years.
You can elect to amortize other costs
- Some startup expenses, such as organizational costs, can be either amortized or you can deduct the full cost in the year you open. But if you choose amortization, certain rules apply:
- The costs must be incurred before you open for business.
- The associated costs must have also incurred if your business had been operating for years
Amortization is somewhat similar to capitalization in that it also involves stretching deductions out over a period of time.
Some costs don’t qualify as startup expenses
- Some equipment you must purchase is treated as a regular business expense. For example, if you’re opening a landscaping business and you buy a truck, generally you must capitalize and depreciate the cost. Such expenses are treated just the same as they would be if you had been operating your business for decades.
Timing can be important
- Timing matters, too. “Startup costs are only deductible if your business does indeed start up,” says Capelli. “And they have to be incurred during the planning and development phase of your business. Otherwise, after that, they become operating expenses.” The flip side to this is that even though your business isn’t operational yet when you incur startup expenses, you can deduct them or begin to deduct them in your first year of business.
Keep good records
- A deductible expense only does you some good if you can prove you spent the money. The burden of proof is on you to show that you spent what you said you spent. “Good records are vital,” says Capelli. “You have to keep careful track of your expenses and this includes maintaining receipts.” Now that you know the basic rules, check with our other articles on business tax deductions.
Please let me know if you have any more questions or need further clarification on anything.
Thanks, and best wishes going forward.
Terri H
Tax Filing Rules for LLC
Startup Business Tax Tips
Starting a Business
Self-Employment Business Income and Deductions
Small Business Start Up Costs
Starting a Business
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Terri Lynn
