As a startup company or small business owner, you want to be able to take advantage of every opportunity that may save you money, save you time, or increase your production. However, sometimes the hardest part is being able to identify where those opportunities may exist. When you become busy running your business and trying to create growth it can be easy to lose track of all the various opportunities available for your business. Therefore, let’s break down the one opportunity that almost every startup company should be taking advantage of. 

So you’ve started thinking about the next great idea or service that you believe will revolutionize the world. You’ve started evaluating the likelihood of success for this new venture or considered purchasing an already existing business. There can be a number of expenses associated with trying to launch your new business venture. What if there was a way to make swallowing those cost a little easier? Luckily, Congress introduced such a provision in order to encourage people to evaluate the possibility of starting new businesses and going forward with such ventures. 


So know you know there is something out there for you but the question is how does it all work? Well normally, expenses you incur in order to start your business is a capital expense and must be capitalized over a period of years. Meaning that you don’t get to deduct the cost immediately but must deduct the cost over a period based upon a fixed schedule. However, there is a carve-out for certain startup and organization cost that allow a small business to immediately deduct certain cost in the year they are incurred instead of over an extended period.  

IRS guidelines provide that a small business can elect to immediately deduct the cost of investigating starting a new company, acquiring an existing company, or starting a new company. As you can imagine, such an amazing opportunity could lead to abuse and therefore certain restrictions have been put in place in order to ensure that the goal of helping new business start is preserved. The restrictions that have been put into place can be characterized into three categories: (1) type of expenses allowed, (2) timing of expense, and (3) total allowed to deduct. 

Allowed Expenses

The type of expenses that are allowed to be deducted must be expenses that would normally be in the ordinary course of your business. There is no clear definition of what an ordinary expense might be but there are some generally accepted practices. Generally accepted expenses are normally associated with the cost of an analysis of the potential market for the business, labor supplies, and cost of a potentially viable product. This list is not exclusive but should be a great baseline to understand as you move forward. What’s important to consider is to ensure that the expense incurred align with your business. Therefore, if you have extravagant expenses that don’t really have anything to do with your business then they probably don’t qualify. For example, if you are starting a bed & breakfast but have expenses associated with purchasing a tractor-trailer then the expense probably doesn’t align with your business (unless you’re starting a bed & breakfast on wheels then please reach out to me as I’d like to learn more). 

Timing of Expenses

The expenses that you incur to investigate a new business, explore the possibility of acquiring a new business and starting a new business should be close in time to when you actually start the business. IRS guidelines provide that a business must elect to deduct the expenses in the first year and if the election is not made then the expenses must be capitalized. In addition, startup companies need to be aware that there comes a time during the lifecycle when you move from exploring the possibility of starting a new company to actually starting a new company. Therefore, it’s important to be able to identify that time in order to ensure that the expenses are properly classified as a business expense or startup cost accordingly.  

Total Allowable Expenses

It would be great if you could immediately deduct all the expenses associated with exploring the possibilities of starting your company but there are limitations. Under current guidelines, a startup company can expense up to $5,000 as startup related costs and $5,000 as organizational expenses. Startup costs are defined as expenses associated with creating or investigating the creation of a trade or business. Again, consider the cost associated with determining whether I should and what I should. Organizational costs are expenses associated with creating the business. Think of these expenses as the cost of forming your business, paying state organization fees, or cost of receiving legal assistance with business formation. 

In order to take full advantage of the available deduction, a small business is required to have a total cost of less than $50,000. Once you exceed $50,000 then the ability to expense is reduced by a percentage until you reach $55,000 when it is totally eliminated. However, don’t quite fret if you have expenses that exceed the threshold you can still take capitalize the expenses over time. 

The cost of trying to start a new business should never be the one factor that you use to determine whether or not you should explore the possibility. If you are passionate about your idea then pursue your passion and let the experts help you decide what opportunities you can take advantage of to be successful. An immediate deduction may not be appropriate for every company and therefore it is important to consult with a tax professional to understand your situation. Robinson Legal would be happy to sit down and discuss your unique needs and determine if various tax provisions would be appropriate for your situation. Please feel free to reach out to us at www.robinsonltd.org or contact Demetrius Robinson directly at drobinson@robinsonlimited.org