• David Manes

Tax savings on start-up costs: how to save on start-up expenses for new small businesses

It costs money to get a new small business up and running. A lot of it. But luckily, when it comes to the start up costs of new small businesses the IRS is not as much your enemy as your friend. Special tax rules exist to help new small businesses with start-up costs, however, the benefits of these rules do not necessarily have immediate effect. Know these rules well when starting your own small business in order to maximize the money you can save.  Let’s take a look at the tax rules surrounding start-up expenses.

Not a business deduction

To take a business deduction you must actually have a business up and running. This may seem obvious, however, this rule can lead to problems for new small businesses. The money you spend to get your business up and running is not deductible because your business is not operating yet. Instead, your start-up expenses are considered capital expenses – costs that you incur to acquire a business that will benefit you for more than one year.

Can I deduct my capital expenses?

Normally, capital expenses do not become deductible until you sell or otherwise dispose of your business. However, there is a special tax rule that allows you to deduct $10,000 of your start up expenses in the first year you are in business, and then deduct the remainder in equal amounts over the next 15 years. Without this special rule your capital expense start up costs would normally not be deductible until you sold or otherwise disposed of your business.

Operation

Once your business begins, the same expenses that were start-up expenses before our business began become currently deductible business operating expenses. For example, supplies you buy before your business begins are start-up expenses and the same supplies, bought after your business begins, are currently deductible business expenses.

Remember, your business must actually start to have start-up capital expenses. If your business never gets off the ground many of your expenses will not be deductible. All the more reason for you to think carefully about spending hard-earned money on a new business.

A strategy for saving

The structure of the rule incentives you to spend no more than the first year ceiling on your start up expenses, so you do not have to wait the full 15-year period to get your money back. This could mean thinking of strategies to postpone spending money on things until after your business has actually started running.

Conclusion

Start-up expenses for a new small business are not business deductions because your business is not yet up and running. Instead, they are considered capital expenses by the tax code. These capital expenses are deductible under a special tax rule that allows you to deduct $10,000 in your first year and the remaining cost over the next 15 years. Keep this rule in mind in order to save money and try to avoid spending more than the initial $10,000 deduction by postponing certain expenses until your business is up and running. For more detailed advice on tax savings for start ups contact your local business attorney.

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