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You've probably heard that one of the many benefits of owning your own business are the tax deductions associated with business ownership. But what are those deductions and which effect you? Here's information to help you understand what you are entitled to deduct.
What expenses for starting a business are deductible?
The costs you incur to start your business are considered capital expenses. While most capital expenses are not deductible, under current IRS rules, you can elect to deduct up to $5,000 in business startup costs and $5000 in business organizational costs in the year your business launches, provided your startup costs are $50,000 or less. The $5,000 deduction is reduced by the amount your startup costs or organizational costs exceed $50,000.
Any startup or organizational costs in excess of the $5,000 can be amortized over a period of 180 months consult with a professional tax advisor while you are planning your business. Tax laws are complicated, and some decisions are irreversible.
Expenses that qualify as startup costs include the costs of researching the business and the costs of getting it going, such as initial advertising, employee training, consulting fees, and other fees you incur before you actually open your brick and mortar or virtual doors for business. Organizational costs are the cost you incur for legal fees, incorporation fees and certain other costs in getting the legal structure of the business set up. (See Chapter 8 in IRS publication 535.)
From a tax standpoint, when does your business actually begin?
You can be in business if you as soon as you are ready to accept customers.You don't have to wait until you've made your first sale. The actual event that triggers you being in business (as opposed to starting a business) will vary by the type of business and your own personal way of operating. Something as simple as handing out business cards, setting up a website or a social media business page, can all signal that you are "open" and ready to accept business.
What expenses can I deduct?
Any product or service purchased for use by or in your business is deductible if it is ordinary and reasonable for the type of business you run. Schedule C filers will generally find their deductions fall into these broad categories:
- deductible business expenses
- depreciable business property
- the home office deduction
- cost of goods sold (if you are a manufacturer or carry inventory)
© 2000, 2014 Janet Attard. May not be reprinted or reproduced without permission.