Can I Deduct Startup Costs? What New Businesses Can Write Off

Most businesses spend money before they make their first sale: market research, a logo, a website, legal fees, an LLC filing fee. Good news: much of that is deductible, but under special rules.

What counts as startup costs?

Startup costs are expenses you pay to investigate or create a business before it begins operating. Examples include:

• Market research and analyzing potential locations
• Advertising for your grand opening
• Training employees before you open
• Consultant fees for setting up the business
• Travel to meet potential suppliers or customers

Organizational costs are a related category for creating an LLC, partnership or corporation, such as state filing fees and legal fees for drafting your operating agreement.

How much can you deduct?

In the year your business begins operating, you can generally deduct:

• Up to $5,000 of startup costs, and
• Up to $5,000 of organizational costs

Each $5,000 allowance is reduced dollar for dollar once total costs in that category exceed $50,000. Whatever you can't deduct right away is amortized (deducted evenly) over 180 months, which is 15 years.

Example: You spent $7,000 on startup costs. You deduct $5,000 in your first year of operation, and the remaining $2,000 over 15 years.

What's not a startup cost?

Some pre-opening spending is treated differently:

• Equipment and assets (computers, tools, vehicles) are depreciated or deducted under Section 179 or bonus depreciation once placed in service
• Inventory becomes cost of goods sold as it's sold
• Costs of a business you never started may be treated differently depending on how far you got

What if I never actually opened?

If you investigated starting a business but didn't go through with it, general research costs typically aren't deductible. Costs for trying to acquire a specific business may be treated as a capital loss. Talk to a tax professional about your specific situation.

When does a business "begin"?

Your business begins when it's ready and available to serve customers, not when you formed the LLC or got your first sale. Expenses after that date are regular business expenses, fully deductible as they occur.

Keep good records from day one

Save receipts for everything you spend before opening. Create a simple list or spreadsheet with:

• Date
• Vendor
• Amount
• What it was for
• How you paid (personal card, cash, etc.)

If you paid with personal funds, your bookkeeper can record those amounts as your owner contribution to the business, so they show up correctly in your books.

The bottom line

Startup costs are deductible, but not all at once if they're large. Track every expense before opening day, separate equipment from other costs, and let your bookkeeper record them properly in your first year.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.