There is almost no phrase scarier to an entrepreneur than “tax time.” This is especially true if it’s your first year in business and you’ve never filed business taxes before.
But while the process may seem intimidating, tax time probably doesn’t have to be the nightmare you’re imagining. The key to making tax-time as painless as possible is preparation. If you take a bit of time to brush up on key startup tax deductions, you’ll not only make tax time easier, but you’ll also save some much-needed cash.
Business Tax Deductions 101
If you’re a first-time entrepreneur who has never filed before, it’s best to start with the basics. Understood in the simplest form, tax deduction is a reduction of income that is able to be taxed. In other words, tax deductions directly impact how much money you pay in taxes. Therefore, the more deductions you take advantage of, the less you have to pay.
The general rule is that these deductions apply to anything ordinary and necessary for running your business. However, it is not always easy to know when this rule applies. As a result, it’s important to understand specific startup tax deductions and the criteria that your startup needs to meet in order to claim those deductions.
Startup Tax Deductions
It’s no secret that running a startup isn’t cheap and that costs can add up quickly. Therefore, identifying valuable tax deductions early on can help to make sure that you aren’t leaving money on the table. Luckily, we’ve put together a comprehensive list of startup tax deductions that you should know about before tax time.
1. Advertising & Promotion
Getting your name out there can cost an arm and a leg, but thankfully the money you spend on promotion is deductible. This can include marking costs (ie. Facebook Ads), promotional materials (ie. business cards), and even website collateral (ie. domain names). In other words, make sure you keep your receipts for all that swag you ordered because you can easily write it off.
2. Auto Expenses
Even if your startup is entirely digital, you’ve likely logged a few miles in your car traveling to investor meetings or even running items to the post office. All of this business travel is deductible and can be done one of two ways. One option is to track your business mileage and take the mileage deduction at tax time (the IRS sets a standard mileage rate each year). Alternatively, you can write off a percentage of your total vehicle expenses. You can also deduct parking and toll fees, so keep a careful eye on that meter.
3. Bank Fees
Whether it’s bank fees, credit card fees, or loan fees, any of the extra charges associated with your business bank account and business loans are deductible.
4. Marchant Processing Fees
Much like bank fees, many of the fees associated with processing credit cards are deductible. This can include fees incurred using services such as PayPal, Stripe, Square, and others.
5. Licenses & Permits
One thing you’ve likely noticed as an entrepreneur is the number of licenses and permits required to get your business up an running. Whether it’s a general business license or a health department permit, keep track of the costs and fees associated with each so that you can deduct them during tax time.
If you’re paying an affiliate or partner to promote your product or service, you can write-off these commissions.
Tech startups are known for their love of ongoing learning and training. Luckily, any reference materials (ie. books) or training programs (ie. online courses), are deductible expenses. This is true for both you and your employees, as long as the training is work-related.
8. Equipment Purchases
Equipment purchases is an obvious deduction that most startup founders know about. However, it is important to note that depending on the cost, the equipment will either be taken as an expense and written off in one tax year, or it will be taken as an asset and depreciated over several years. The depreciation method is used to allocate the cost of an asset over the lifetime of that asset. For instance, if you purchase a $4,000 laptop and plan to use it for four years, the computer would depreciate $1,000 per year. Therefore, you can claim that $1,000 depreciation expense each year on your taxes.
If you’re in your first year of running your business, you’ll likely purchase a lot of equipment. In this case, it’s best to speak to an accountant to know how to properly handle these kinds of startup tax deductions.
9. Furniture & Decor
Even if your office is fairly bare bones, you’ll still need a couple of key pieces of furniture for day-to-day operations. Just like equipment, furniture pieces such as chairs, desks, and whiteboards, can be written off as an expense or taken as a depreciating asset.
Whether you host regular public events or you’ve simply held a few internal parties, many of the expenses related to those business events can be written off. This includes catering fees, venue rentals, and entertainment costs such as hiring a speaker.
If you sent gifts to your employees, customers, or affiliates, you can deduct up to $25 per recipient per year. This means that if you reward your top salesperson with a $50 gift card, you can deduct $25 of that cost.
You’ve likely invested in some kind of insurance to protect your startup. You can write off the cost if the insurance is for general liability coverage, commercial property insurance, cyber liability insurance, or loss-of-income insurance.
13. Interest Expenses
If you borrowed money to get your business up and running, you can write off the finance charges and business loan interest.
14. Leasehold Improvements
If you’ve made improvements to your commercial space, you can write off the costs of those renovations—as long as the improvement is attached to your business property. For instance, if you install a portable bookshelf, that’s not a leasehold improvement. However, if you install built-in cabinets, paint the walls, put carpet down, or have the plumbing fixed, all of this is deductible. And just like equipment and furniture, leasehold improvements can be expensed in one tax year or taken as a depreciating asset.
While the above deductions are relatively straightforward, meals are where startup tax deductions begin to get a little bit complicated. Since the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22nd, 2017, writing off meals has become the subject of much debate. In most cases, it appears that meals consumed with employees, while traveling, during work shifts, or with business clients, are 50% deductible. However, there are some grey areas, which is why it is best to check with an accountant before claiming any meal deductions.
It is also important to note that you can no longer write-off the cost of entertaining a client. This means no more meetings at concerts or sports games unless you’re willing to take on the cost yourself.
16. Payroll Expenses
There are a number of expenses related to running your company payroll that you can write off. Deductions include payroll service fees paid to the provider you use, workers’ comp insurance, and local, state, and federal payroll taxes.
17. Professional Fees
Any legal or professional consultations (ie. with an accountant) for your business are deductible.
18. Office Expenses
Beyond furniture and equipment, there are a number of other office expenses you can deduct. For instance, you can deduct any ongoing software subscriptions for things like project management or accounting. You can also deduct basic office supplies such as pens, paper, printer ink, etc..
Whether you’re renting a dedicated office space or your company operates out of a shared co-working space, your rent is deductible.
20. Repairs & Maintenance
Just like rent, any ongoing maintenance for your office space (ie. janitorial services) is deductible.
Any utility bills for your office are deductible. This includes utilities such as heat, water, garbage, security systems, internet, etc..
22. Telephone & Communications
The cost of a landline telephone or VoIP service for your office is deductible.
As long as your trip has a business purpose, you can write off most travel expenses. This means you can deduct airfare, ground transportation, and lodging.
24. Research & Development (R&D)
Innovation isn’t cheap, but it’s necessary for most startups to develop their product or technology. Fortunately, the R&D tax credit allows you to offset some of the costs associated with your R&D process. However, it’s not as straightforward as you might think.
In some cases, you can treat R&D costs as business expense and deduct themin one tax year. You can also amortize your R&D costs and deduct the expenses over several years. In order to determine how to best write of your R&D costs, it’s best to consult with an accountant.
25. Salaries & Benefits
Wages, bonuses, and benefits (ie. health insurance) that you provide to your employees are deductible. The amounts you are able to claim will likely be in relation to the size of your company and your total earnings.
If you hire a contractor to perform a service such as programming or graphic design, you may be eligible to claim fees of $600 or more.
27. Cost of Goods Sold (COGS)
Cost of Goods Sold is an expense that you incur as a seller in the process of manufacturing or selling an item. In the case of tech startups, what’s being sold is usually virtual. In this case, COGS is directly related to the application or product you’re selling, rather than your operational costs. For instance, COGS could include software hosting costs.
28. Charitable Contributions
Any cash or in-kind donations made to charity are tax deductible as long as the organization is categorized as a 501(c)(3) non-profit. In most cases, charities will provide you with a receipt so that you can write off the donation.
Home Office Deductions
If you’re an early stage start-up, you may not have a dedicated office space yet. As a result, you probably spend a lot of time working out of your home. If this is your situation, there are two key deductions you’ll want to pay attention to.
1. Home Internet
If you spend a lot of time working online from home, you can write off a percentage of your home internet bill. This percentage is based on how much internet is used for personal use versus business use.
2. Home Office Expenses
If you are primarily working out of your home, you can take advantage of the home office deduction as long as you meet the criteria laid out by the IRS. First of all, you must be using a space in your home that is exclusively reserved for business purposes—it can’t double as your living room. The home office space must also be used regularly for business purposes and not just an occasional conference call.
If your home office meets the above criteria, you’ll need to divide your home office square footage by the full square footage of your home to get the deductible percentage of your home expenses. You can then write off a percentage of your rent or mortgage, your renters’ or homeowners’ insurance, your utilities, and any repairs to your home office.
While the above list is not completely exhaustive, it should provide you with a much better understanding of the startup tax deductions that you can take advantage of. Of course, it’s important to keep in mind that a deductible expense is only good if you can actually prove that you spent money on what you said you did. In other words, careful record-keeping is paramount when it comes to backing up those claims and keeping the IRS happy.
If you think that your books may be on the messy side, schedule a free consultation with OpenDigits to find out how to get your startup tax-ready.