Tax guide

Deducting Startup Costs

Starting a business requires some work on the front end, before you open the doors or see your first client. Usually there are costs involved, whether it’s from refurbishing a storefront to buying equipment and supplies. These start-up costs are deductible, but not all at once. The IRS considers start-up costs to be capital expenses, because the expenses incurred before the business starts will benefit that business for years to come. So expenses to get the business going have to be depreciated and deducted over time.

In order to deduct your start-up costs, the expenses must be:

  • Deductible if you were already in business – if they're not deductible after you start your business, they're not deductible as start-up costs either.
  • For a business that was actually started
  • Incurred before the business began operating

So what might qualify? Here are some examples:

  • Travel to check out possible business locations or to find financing or suppliers
  • Professional fees for lawyers or accountants
  • Repairs to equipment or buildings
  • Utilities
  • Market research or pre-opening advertising

Keep in mind that as a self-employed taxpayer, you can deduct a lot more expenses than someone with W-2 income. These deductions are valuable, and so the IRS may want to verify that you really are self-employed, and not actually someone's employee. They may seek proof that your business isn’t just a hobby, or some sort of ploy to escape paying taxes. These are just more reasons why it’s vital to keep accurate records for your business.

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