5 Tax Deductions For Your First Year In Business
Though it might seem like a straightforward proposition to deduct the expenses that you incur when planning and embarking on a new business, the process of accounting for business expenses during the first year of a business are not quite as clear cut as you’d think.
There are so many things that a first-year startup business needs to invest in, including vehicles, equipment, organizational costs, and leasehold improvements. Each gets approached differently from a tax perspective, and that makes things a bit complicated. Let’s look at each category of expense:
- Vehicles: Different types of vehicles get treated in different ways. If you purchase a small truck or automobile to be used by the business it gets treated the same way that any other piece of equipment does, though it may be subject to the rules that apply to luxury vehicles and the recovery period switches to five years.
Depreciation for the first year is limited to a maximum of $3,160 though light trucks and vans can be depreciated to a maximum of $3,560. Businesses do have the opportunity to elect what is called the bonus depreciation, which allows the amount to increase by $8,000.
- Equipment: Though you may be putting equipment in place in preparation for your business’ operations, there can be no deduction for that expense until you are actually using the equipment, and that means that no equipment deductions can be made until the business is up and running and the equipment is placed in service.
Still, the rules regarding deductions for equipment are fairly forgiving. Businesses can take advantage of the Sec 179 expensing election to deduct their office furnishings, their equipment, and many of their other expenses in the year that the investment was made as long as the equipment starts being used in that same year.
That being said, there are limitations to how much can be deducted: Deductions can not be for more than the taxable income that a business earns through their business activities or active trades, including W-2 income and a spouse’s businesses or active trades if the business owner is married and files their taxes jointly.
- Organizational Costs and Start-Up Costs: When a new business is established as either a corporation or a partnership, there are certain expenses that are incurred. These are considered organizational costs, and can include such costs as incorporation fees, organizational meeting costs, legal services and temporary directors’ fees.
Amounts up to $5,000 are eligible for deductions beyond the expenses allocated as being due to being a start-up. If the costs exceed $50,000, the overage is used to reduce the $5,000 deduction.
Start-up expenses are different from organizational costs, and can include costs for items such as wages paid to employees and their trainers while being trained, ads announcing the impending opening of the business, consultants’ fees and salaries as well as other professional fees, and surveys of potential markets, labor supply, etc.
There is another $5,000 deduction available for these expenses, with the same rules. For both organizational costs and start-up costs, business owners can opt out of the election and capitalize expenses or choose to take the election and amortize the costs over 15 years. Choosing to capitalize expenses means that the business can only recover the expenses once the business has been either terminated or disposed of.
- Leasehold Improvements: When you make improvements to a new business location, the costs generally need to be depreciated over a 15-year period.
However, the IRS is allowing businesses to take a bonus deprecation through the end of 2019. This means that during the firs t year of the business, businesses can take between 30 and 50 percent of the costs of interior qualified improvements that they make to a non-residential property.
These deductions are limited to expenses incurred after the building is actually being used for the business. In addition to this deduction, business owners are able to deduct costs for qualified restaurant property, qualified leasehold property and qualified retail improvements as an expense deduction under Sec 179.
The first year in a business’ life is critical to its success, and so is managing deductions and expenses in a way that is tax advantaged.
For knowledgeable advice and guidance that will facilitate your ability to maximize the deductions you can take, contact our office at (407) 680-0900.