Top 9 Tax Write Offs for NEW Businesses & Startup Costs

okay let's discuss tax write-offs for new businesses and side hustles because before you even start or buy a business you're likely going to need to spend some money doing some research and deep analysis of your business idea before you launch it for example this could mean that you need to develop a thorough business plan that is backed by actual product research and the irs defines these type of expenses as business startup and organizational cost and starting a business isn't always cheap in fact it's estimated to be about 30 000 to start a new business according to the minority business development agency but even though your business may not be officially open yet you can still write off these type of expenses or at least a portion of them against your taxable income which is going to be extremely helpful in you reducing your overall tax burden in fact every year more than 2 million taxpayers overpaid their income taxes and we're not talking about chump change okay taxpayers are overpaying by close to one billion dollars and this could be due to poor tax planning or maybe they're just missing out on some of these big tax write-offs so in this video what i want to do is cover which business startup costs are deductible how much you can deduct in total and how you can amortize these costs and i'm going to break all this down with examples and calculations along the way so if that all sounds good to you then make sure you like this video while the intro plays [Music] hey there and welcome to our channel i'm sean with life accounting the accounting company that helps you save on taxes and build more wealth i was inspired to make this video after speaking to one of my clients you see my client was a normal w-2 wage worker and decided that she wanted to quit her job to start her own business but she was just completely overwhelmed at all the costs associated with creating a business and setting it up but that's when i told her hey you know business startup costs are actually deductible right really well uh this is this is kind of a side hustle anyway that's okay in fact side hustles are often seen as businesses in the eyes of the irs really okay well tell me what can i deduct okay so there's a few let's go ahead and get started with tax write-off number one consumer surveys conducting surveys for market research can be critical to justify your business idea and we're not talking about asking your friends or your co-workers and your mom what they think sorry mom but instead surveying a truly random group of 100 200 300 people who have no emotional connection to you and are willing to tell you what they really think about your product or service and that is pure gold because then you can get a true grasp on how the market may perceive your brand and this can actually help you raise money from investors because investors look at your research and say okay so it looks like a lot of people love this product i've got to get in how much money do you need because these surveys give you an insight into demand by asking people stuff like okay do you use any competing products and what don't you like about them or what do you like about them and how long have you used them for or where did you first hear about them from and would you buy it again and if so how much were you willing to pay for it etc and just by getting the answers to some of these questions you can easily see how that's gonna help you create a strong business idea now consumer surveys can vary greatly in cost but can average somewhere around fifteen hundred dollars and the best part is you can write off fifteen hundred dollars against your income which could save you 30 to 40 percent depending on your tax bracket okay let's move along to tax write-off number two professional fees here's the truth okay twenty percent of startups fold in the first year and thirty 30 failed in just the second year of business and i think that's because many people are trying to build a business all on their own with very little experience but look you don't have to start a business all by yourself okay you can hire someone to help you like an experienced coach or consultant that can guide you through a great business coach can show you stuff like how to raise capital for your business or how to map out a realistic budget or how to develop a thorough business plan or review your market research and your ideas and even teach you how to set up your advertising campaigns and when you pay a coach or consultant these are considered to be professional fees but it doesn't just apply to consultants right like it could be hiring an engineer or hiring an agent or a marketer or even a tax accountant which by the way if you need professional tax planning and you enjoy valuable information like this then consider working with our team by checking out the program in the description below where we help you create a tax plan and save on taxes and on top of the value that we deliver to you you can also deduct the cost of the service on your taxes so we say when when when all the way around let's move on to tax write-off number three site selection costs now these are business startup costs associated with finding and securing an office or workspace so if you find yourself driving around looking at different offices then you can deduct the business mileage using the standard mileage deduction rate or if you find yourself traveling out of state or out of country to locate something like a manufacturing facility then you can also write off stuff like the airfare expenses or the lodging or the transportation or the internet fees if you need to do some work while you're out there or even if you decide to hire an agent to help you find the actual location then those can be written off as professional fees or site selection costs now the awesome part about being a business owner in the eyes of the irs is that you are able to create a business lifestyle that allows you to write off lifestyle expenses which by the way i have a great video breaking down how entrepreneurs can do exactly that so if you're interested i'll put a link to that video at the end so you can watch that video after you finish this one all right text write-off number four is business equipment or property the startup phase of a business can be very exciting and very fast paced and you're probably doing some research you're meeting with people you're establishing frameworks and management systems and you're really just moving and shaking trying to get your business off the ground but sometimes ordering business equipment or acquiring a lease on a property can take 30 60 90 days just to get the equipment that you need so in the interest of time many people end up acquiring these equipment or leases before they actually establish their business entity and many people think because their business isn't officially set up yet inside of an entity that they've completely missed out on taking these deductions but you can still write them off as business startup costs to a certain limit which we'll talk about very soon okay up next we have number five advertising expenses so you can write off any cost associated with advertising your business launch and the great thing about running ads specifically digital ads is that you get real time feedback from your audience which can actually help you even more when it comes down to figuring out the viability and the demand of your business idea before you get too too deep because today digital ads can show you exactly who is responding the best to your promotions by looking at the specific age groups that respond to best the specific genders who are responding the best it's like is it male or female what locations they're in what their interests and behaviors are and a whole lot more and the great news is you don't have to go crazy with spending a lot of advertising money to get some great feedback plus you can write off your advertising expenses as well alright moving on to tax write-off number six i have cost in acquiring a business so the real truth is starting a business isn't for everyone and many people may succeed simply from buying one but i get it right because many people think to themselves come on sean buying a business is extremely expensive there's no way i can afford to do that but look buying a business isn't as difficult as you may think in fact i often check a website called flippa.com where you can buy online businesses for under 2500 and some of these businesses already have websites they have traffic they have sales so you come out winning straight from the gate plus it's a lot easier to get a loan on an existing business that already has started to generate cash flow because they are often seen as more credit worthy to lenders now in general you are still going to have costs associated with acquiring a business right like you may need a business broker you may pay fees to a website or you may need to bring in an attorney just to be certain that you are correctly transferring business ownership and you're doing all the necessary due diligence so you don't get scammed now as i mentioned i'm personally looking into buying a business so if you'd like to see me create a video on how to buy a business and document my process then please tell me in the comments section below the next tax deduction i have is number seven organizational meetings once again before you establish your business entity you may need to find partners or investors that can help you take your business idea to the next level and because of that you may need to set up meetings where you pitch your business idea to potential partners or you talk about how you want things to be structured from an equity perspective or you work on operating agreements and bylaws for which the business will operate or you just work on ways where you're going to dominate the marketplace and your competitors and so you may want to rent out a conference room at a nice hotel and get some food and print out materials to somewhat whine and dine your partners right and you can write off these organizational costs before you launch your business all right tax write-off number eight are incorporation and partnership filing fees so these are going to be organizational costs associated with establishing your business entity so that may be registering your business with your secretary of state as an llc as a partnership or as a corporation now these aren't usually huge expenses and typically range between 100 to 1 000 depending on the state you live in and the level at which you want to incorporate but i often find that when i'm working with my clients that they still miss these small tax deductions because they just overlooked them but it still helps them save a little bit of money when it comes to tax time and i think every tax deduction matters so definitely don't make the mistake of leaving this out when you file your taxes all right tax write-off number nine are legal fees now legal fees can qualify as business startup costs or organizational costs but this is important to call out especially if you're partnering with other people because many people can get away with creating their own operating agreement from a template and doing it themselves but if you're operating in a unique way with your partners or your investors then it's going to be wise to actually bring in an attorney that can review your agreements and just make sure everything checks out in the way that you guys want to operate because listen the last thing you want to do is start a business start making millions of dollars and then realize there is a serious flaw in your partnership agreement that can ruin it all now let's answer a big question with number 10 how much startup costs can you deduct in your first year all right let's crunch some numbers so the first thing you need to know is that there is a first year limit on how much startup cost you can write off so you can deduct five thousand dollars in qualified startup costs if you had less than fifty thousand dollars in total expenses in the year your business starts operating and if your startup had cost over fifty thousand dollars then you can deduct one dollar for every dollar you spent over fifty thousand after the 5 000 limit now i know it's a little bit confusing but for example if your total startup cost before establishing your business was 53 000 then you can only deduct 2 000 which is that thousand minus two thousand dollars which also means if you spent more than fifty five thousand dollars on business startup and organizational costs then you won't get any tax deduction but look that's okay because you can still amortize the remaining cost to be deducted from your income in later years this means basically that you can deduct the cost in equal installments over a 180 month period starting from the first month your business opens this is essentially what is meant by the word amortize so from a pure tax planning perspective you have to ask yourself okay do you need the 5 000 deduction which definitely helps if you made a sizable amount of income but if you don't necessarily need the deduction and you can live with the tax burden then what you can do is spend what you need for your startup right now and then later on write off the expenses associated with it particularly during a year where you're in a larger tax bracket because you are making more business income you can claim this five thousand dollar deduction in part five of the schedule c on the 1040 form where you itemize all your expenses okay let's talk about number 11 how tax deductions work after your first year or when you launch your business so once your business entity is established then the tax system really starts opening up for you because section 162 of the internal revenue code says that you can deduct all necessary and ordinary expenses paid or incurred during a taxable year to carry on any trade or business so ordinary expenses mean that it is common and accepted in your industry and necessary expenses mean that it is helpful or appropriate for your business so that can mean writing off stuff like equipment office supplies your home office your cell phone expense your cost of goods your salaries and wages your travel and a lot more for example let's say your business made five hundred thousand dollars in revenue last year but then you incurred 250 000 of ordinary and necessary business expenses well in that case your taxable income after taking expenses as a deduction will be 250 000 now of course the irs isn't going to make it easy for you there are rules exceptions and exclusions for various types of business write-offs so make sure you are subscribed to our channel as we cover different tax deductions and tax credits in detail on this channel now before we wrap up here's an important note if your startup fails and you did not amortize all the costs then here's the thing okay if your business closed down then you will no longer be able to write off any startup costs you had because now these would be considered personal expenses so like i always say don't try to get the most tax deductions that you can but instead try to get the tax deductions that help you the most in your business all right coming up next we have two more videos that you may enjoy as well so check those out if you haven't already and i'll see you over there

Channel: LYFE Accounting

Views: 13,849

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Id: HwI8PCy7HDM

Length: 16min 16sec (976 seconds)

Published: Sat Feb 12 2022