TechDee

To understand your potential tax deductions, you may want to look into the startup and organizational costs in a little more detail. The costs you incur when getting your organization off the ground generally fall into three categories: the cost of creating the business, the cost of launching the business, and organizational costs.

The cost of creating your business includes what you spent on feasibility studies, scouting potential locations, conducting market analysis, etc. What you spend on creating awareness about yourself and your products and hiring your initial team falls under the cost of launching your business. Legal fees, consultation fees, and what your accountant charges you to structure your recordkeeping and reporting falls under organizational costs.

As previously mentioned, you can only qualify for the $5,000 startup cost and $5,000 organizational cost deductions if your startup costs are lower than $50,000. If your setup costs overshoot this amount, you lose out on the cuts by the amount by which you exceed this threshold. For instance, if your startup costs come to $54,000, you would be eligible for a reduction of $1,000 in the first year of your business.

Suppose your legal fees, insurance costs, and initial advertising expenditure come to more than $55,000. In that case, you will have overshot the limit under which you would qualify for a reduction in your maiden year.

The IRS will then amortize your deductions over the coming years. Amortization refers to breaking the amount into smaller equal amounts, deducted year by year over a given period. These calculations can be tricky, so you may want to work with a startup tax accountant to assess your options.