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Financial & business-planning

How to Deduct Startup Costs and Organizational Expenses?

by Isla Wright, on Jul 12
It takes a while for a startup to become profitable or self-sustainable.
Startup costs

Which, in turn, means that every single additional dollar you spend on startup costs and organizational expenses takes you one step further away from that, already distant, break-even point. One of the best ways to turn this issue into a much smaller problem is to find a way to deduct start-up costs and organizational expenses. Here are several things you need to know on this topic.

Which startup costs actually count?

In order to start unveiling the mystery of which startup costs you can actually deduct, you first need to know what startup costs and organizational expenses are. Marketing and business planning related costs like the analysis of your target market, survey of the labor supply, transportation facilities and many similar expenses definitely belong in this category. Then, there are salaries and wages for the employees under training, advertising (especially related to the opening of the business) and salaries for consultants.

Aside from these, the first month of running a business will require a lot of traveling in order to negotiate face-to-face with suppliers, customers or distributors. Needless to say, travel expenses related to these tasks are also up for a later deduction. Overall, in order to qualify, the startup costs need to exceed $50,000 for which, you are eligible to receive as much as $5,000, which is the first-year deduction limit. While, at the moment, this may not seem like that much, every single dollar can make a difference during the first five-year period (this is where 90 percent of businesses fail).

Consider tax depreciation

In order to ensure that your startup is at a great starting point, you need to make a solid financial projection for the following period. Sure, during your first year, the issue of startup cost deduction will be huge, yet, as soon as you get past your first year, you might find your startup’s budget to be under too great of an influence of this one-time aid. Past your first year, you need to find as many financial benefits as possible, and looking for reliable tax depreciation schedules might just be the way to go. In this way, you get to create a pragmatic approach to taxes in the long run, by using that first-year organizational expenses deduct as a starting point.

Criterions worth keeping in mind

In the first section, we discussed the costs that qualify for this deduction, yet, this isn’t always the case. For instance, if you were already in the business, your costs won’t be treated as startup costs and, therefore, not be eligible for this particular deduction. Next, you might be running two businesses and, perhaps, plan to sneak in some of your previous business’s costs as the cost of running a startup. Needless to say, this is not only illegal but also highly fraudulent. Finally, the expenses that incurred before you actually registered your business are hard to prove (as startup-related), which is why you should register as soon as possible.

How to file for a deduction

The next thing that most people are so interested in is the question of how to file for a deduction. First of all, you have the first-year limit of $5,000, yet, it’s possible to also qualify for a first-year amortization that will add to the full amount that you receive. This is also why the date at which you submitted your application matters. The way in which this is calculated is fairly simple – the full year’s costs amount, minus the first-year limit, divided by 15. Still, this only goes for the full year’s amount, so if, for instance, you’ve started your business in August or September, you’ll receive one-third of this amount as the amortization amount.

That’s not all

Lastly, you need to understand that deducting startup costs and organizational expenses isn’t done on a uniformed scheme. Instead, you need to consider factors such as your corporate structure. A partnership, an LLC, a corporation and a sole proprietorship follow different deduction schemes, which is an important factor to be considered.

Conclusion

While it is true that, during your first year, every bit helps, this deduction can in no way be considered as minor, seeing as how it allows you to redeem a massive part of your spending. Due to the fact that most startups fail in the face of the lack of cash flow, the capital injection that comes from this is more than worth it. In other words, deducting startup costs can indeed make a difference.

Note: Full or partial copy of the publication is allowed only with the direct active link to InnMind platform.

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