5 Things to Know Before Doing Your Startup’s Taxes

Perhaps more people than ever have launched their own businesses, pursuing their dreams of bringing a product to market or making it big. Tech startups have driven major changes in the American economy. However, even if your business is very small and just in its early days, it’s important to keep your legal documents well-organized. This includes taking care of your business income taxes, of course.

Some people hesitate to launch their start-ups because they are concerned about both the potentially high costs of business taxes as well as the complexities involved. However, there are ways that you can save money when filing taxes associated with your start-up. There are deductions and credits that you can claim to help reduce your tax burden and continue to help your start-up grow.

We know that business taxes can be complicated, especially when you are working on your new, privately owned company. Seeking the assistance of a qualified tax professional might also  ensure you make the most of the opportunities available to you. Regardless, we’ve got the scoop on everything you need to know to do your startup taxes right this tax season.

1. You Can Deduct Start-up Expenses

You can use the costs of starting up your business to redue its tax burden. Start-up costs are defined by the IRS as amounts incurred or paid for either:

You can deduct up to $5,000 of start-up costs for your business as well as another $5,000 of organizational costs. These start-up costs can include funds that you spent on investigating the potential of the business as well as the actual loss.

If you have more than $50,000 in costs associated with starting your business, the deduction can be reduced by the amount that you exceed $50,000. This may be an incentive to keep your start-up costs under control. If you spent more than $55,000, you’ll need to amortize all of your costs over subsequent years rather than deducting $5,000 in the first year.

Organizational costs are the expenses that you pay to set up a business structure, including creating a corporation, LLC or partnership. They can include legal fees and other expenses. Note that qualification costs, like getting the proper licensing to operate, are generally not included as organizational costs.

In addition, most startup expenses are considered capital costs. These can’t be deducted as business expenses in the first year; instead, they need to be depreciated or amortized over a number of years. In some cases, you’ll recover on your taxes for these costs only when you close or sell the company. You don’t have to navigate this alone. A qualified tax professional can help you to maximize your startup deductions and properly designate your capital assets.

If you decide work with an online accountant, you can just collect all the costs of launching your business. Your accountant will let you know how these costs will affect your tax bill and which may be deductible.

2. You Can Amortize Other Business Costs

You don’t have to deduct all of your start-up expenses in the first year, especially as they may far exceed $5,000. Instead, you can amortize the costs by deducting a portion in the first year and amortizing the rest over 15 years, deducting an equal installment each year. This could be an option if you expect to make more profits in the years to come and want to reduce your future tax burden.

Not all expenses can be amortized. For example, property that you buy, like offices, equipment or vehicles, does not qualify for amortization. Here, you will need to depreciate the value of the property.

You can use IRS Form 4562 to amortize your start-up expenses or organizational costs, and your online accountant can advise you as to which costs qualify.

3. Not All Costs Are Start-up Expenses

Only some start-up costs are deductible, however. In general, your costs for investigating the business, often called investigation costs, are deductible. These include developing the project, performing market investigations or advertising the launch of your company. It can include training wages, professional fees, lease costs and even customer surveys. As noted, organizational costs, like legal fees, are a separate matter with a separate tax deduction. While they are not part of your start-up expenses as such, they are still deductible.

Not all costs are deductible, however. In addition to capital costs, you cannot take the first-year deduction or amortize your real estate taxes, the costs of issuing and selling stock or the costs associated with transferring assets to the corporation. If the business never launched, there are restrictions on what you can deduct. If you’ve changed your mind about a specific business after detailed investigation, some costs may be considered personal capital losses. If your business investigations were not specific, however, these are typically personal expenses that are not normally deductible.

4. Keep Timing in Mind

Of course, you have to launch the business to deduct your start-up costs. You must show that these expenses were costs that you paid specifically to set up or launch the company, or else they may be simple operating expenses. If you haven’t launched your business but are planning to launch the business next year, you may be able to deduct them when you start doing business. Keep track of all of your expenses associated with your start-up.

5. Good Records Matter

You can only claim a deductible expense if you have evidence of the money you spent, how you spent it and what the expenses are for. If your tax return is audited, you need to have backup information to support your claim. Good business records are always important, but this is also true about your tax deductions for your first year of business. Make sure to keep all of your receipts, original documents and accounting records intact.

If you are confused and overwhelmed by business taxes or just want to make sure that you’re receiving qualified, professional advice to help you maximize your savings, contact the online accountants at Picnic Tax. You’ll pay a flat fee based on your needs, and we’ll match you with an online accountant with knowledge and skills in handling business taxes. You don’t have to go to in-person meetings; you can just upload all of your receipts online. You can feel confident that you’re receiving the tax savings you deserve when you file your start-up taxes with an online accountant.