How Start-Up Cost Deductions Can Help New Entrepreneurs

BY JENNINA JOHANSEN

Last year, we as a nation expressed our disdain for the workplace in huge numbers. The entrepreneurial spirit had been planted in 2021, and 2022 was the execution time.

Starting a new business can be a daunting task for entrepreneurs. It requires careful planning, research, and investment. With so many different expenses to consider, it can be overwhelming trying to figure out what costs to prioritize and how to make the most of your budget.

As a manager for a leading nationwide tax company, I was astonished at the number of erroneous tax returns and audits that were causing major disruptions in the lives of honest, hardworking taxpayers. I was frustrated that the public was paying balance due notices without even knowing if the balance due was correct. So last 2020, after seeing the extent of financial trauma erroneous letters created, I created The TAX Group LLC in order to spend more time educating my clients without the pressure of time productivity measures.

Entrepreneurs should get passionate about tax saving as much as making money. Simply put, the money you don’t have to pay in taxes is the money you can and should maximize to grow your business. And trust me, the IRS wants entrepreneurs to make money and succeed in their businesses. From the perspective of the IRS, when entrepreneurs make money, they contribute to the country’s overall economic growth and stability, which in turn benefits everyone.

Becoming a successful entrepreneur requires being tax savvy and educated. What does this look like? It requires you to be extremely passionate and diligent with taxation rules or work with a business-savvy tax professional who will take the time to understand you and your business.

One way to save money and reduce the overall cost of starting a business is by taking advantage of tax deductions. Understanding the various start-up cost deductions available to new entrepreneurs can help you save money and keep your business finances in order.

The first step in maximizing your start-up cost deductions is to understand what types of expenses are eligible for deductions.

Generally, start-up costs include all expenses incurred when creating a new business, such as research and development, advertising and promotional expenses, and organizational costs. Some typical start-up costs that are eligible for deductions include the following:

Business Formation Costs: The fees for incorporating your business, such as licenses, legal documents, doing business as, trademarks, and accounting fees, are included here.

Research and Development Costs: All expenses related to researching and developing your business ideas, such as market research and product development, are listed here.

Equipment and Supplies: This includes the cost of purchasing equipment and supplies necessary for your business, such as computers, furniture, and office supplies.

Advertising and Promotional Costs: These are expenses related to advertising and promoting your business, such as brochures, flyers, and other marketing materials.

Travel Costs: Expenses related to traveling for business, such as airfare, hotel, and meals, are included here.

Once you clearly understand what types of expenses are eligible for start-up cost deductions, you can begin to take advantage of these deductions to reduce your tax liability.

Here are some of the most important deductions to keep in mind as you plan your start-up costs:

Section 179 Deduction: It is a tax provision that allows businesses to immediately deduct the full cost of qualifying assets, such as equipment and supplies, up to a specified dollar limit. This deduction can be especially beneficial for small businesses and new entrepreneurs who are just starting out.

Depreciation: This tax deduction allows businesses to spread the cost of equipment and property over several years rather than deducting the entire cost in the year it was purchased. This can be a useful way to reduce your tax liability over time.

Home Office Deduction: If you are using part of your home as a dedicated workspace for your business, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of your mortgage interest, utilities, and other related expenses.

Business Meals and Entertainment: You may be able to deduct 50% of the cost of business-related meals and entertainment, such as business lunches or networking events.

Research and Development Tax Credit: If your business is involved in research and development activities, you may be eligible for a tax credit that can help offset some of the costs associated with these activities.

Subscriptions and memberships: Monthly and annual memberships and even software and app subscriptions can be significant expenses for a business. However, they can also be deductible as business expenses as long as the subscription or membership is directly related to your business and necessary for the conduct of your trade or business.

Taking advantage of start-up cost deductions can help new entrepreneurs save money and reduce their overall tax liability. By understanding what types of expenses are eligible for deductions and how to maximize these deductions, you can keep your business finances in order and stay on track as you grow your business.

Whether you are just starting out or have been in business for a while, it’s important to stay informed about the latest tax provisions and take advantage of every opportunity to save money and reduce your tax liability.

About the author:

Jennina Johansen is the CEO of The Tax Group LLC, based in Redding, California. They are a group of tax specialists and enrolled agents working together to serve and protect the financial health of their clients from all 50 States and Canada. The Tax Group specializes in handling IRS notices and negotiating with IRS, so you don’t have to.