Frequently Asked Questions(FAQ)

What’s the difference between business expenses and startup costs?

Business expenses aer costs you incur in your ordinary course of business. Startup costs, on the other hand, are costs you incur as you create a new business. 

Can I deduct startup costs on personal income?

You can deduct startup costs on your income tax return for the tax year in which your business is operational and generating income. You may deduct up to $5,000 in business startup costs and $5,000 or organizational costs. Note that these deductions must be reduced by the amount that your costs exceed $50,000.

Can an LLC deduct startup costs?

If you have an LLC with two or more members, you may amortize your startup costs. Unfortunately, this is not the case if you’re a one member LLC. If your LLC only has one member and your startup costs are $5,000 or less, you can deduct $5,000 in operational expenses in your first year of business. 

How do I calculate business startup costs?

To calculate business startup costs, make a list of all your expenses and total them. Then determine which IRS rules apply to you so you can calculate your costs accurately. 

Should start-up costs be capitalized or expensed?

If you expense your startup costs, you’ll add them to your income statement and deduct them from your revenue to calculate profit. But if you capitalize or amortize, your costs will count towards your capital expenses and your income statement will only contain your depreciation. It’s up to you how you want to categorize your startup costs as there is no set rule that exists.

When is my business considered operational?

The IRS will likely consider your business operational on its date of incorporation. This means you can start selling products or services. While you don’t have to generate any income or sales on your first day of operations, you must be equipped to do so. 

What is the difference between amortization and depreciation?

Amortization is when you spread the cost of an asset over its useful life. Depreciation, however, is the loss of value your asset faces over time. These are two methods of calculating what your assets are worth. 

Can you deduct start-up costs with no income?

You can deduct startup costs on your income tax return for the tax year in which your business is operational and earning income. Be sure to keep track of your costs so you can take advantage of the startup costs deduction when the time is right. 

What are some of the expenses I can write off once my business is operational?

There are a number of expenses you can write off once your business is operational. Several examples include business auto expenses, equipment, advertising and promotion, and employee costs.

About the Author

Anna Baluch

Anna Baluch

Personal Finance Writer

Freelance copywriter who enjoys writing for large publications as well as startups, small to medium sized businesses.

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