Mark Kohler explains how to deduct startup costs. The IRS allows a $5,000 immediate deduction for qualified startup expenses, with anything over that amortized over 15 years. Your business isn't "in business" until the first sale, so make one before year-end to claim deductions on pre-launch spending.
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Hi, Mark Kohler here with another tax and legal tip. Let's talk about startup costs. Now, this is an important expense for all business owners because at one point or another your business was in startup mode and we want to make sure we maximize those write offs and track them properly. Alright, let's hit the basics. First. Tracking. I need you to write down everything related to the startup of your business from the day you think of starting your business. I don't care if you use QuickBooks or an Excel spreadsheet or a pad of paper or rock and chisel, write it down because your accountant at the end of the year is going to need them. So track them somewhere and then when your accountant says, oh, you started a small business, you can throw out all those startup costs. Next, timing. Now, a startup cost according to the IRS has to directly relate to the startup of your business. Now, there's no timing rule per se, as long as you can show the costs directly related to the startup. Now, I think it's going to be hard to write off your cell phone two years ago when you thought of starting a business, but if you've been in research and development and building prototypes in your garage for two years and you can show that prototype evolving to what you're selling today, that could very well be a startup cost that you've captured along the way for the last two years. But typically for all of us, startup costs are going to go back maybe six months to a year at most, and, and you're going to take all those costs related to developing your business idea, legal marketing, business development in products or services and testing them, and printing costs, and I don't know anything related, which could even be that cell phone at a reasonable time period from the beginning of your business. Third, how much of these are actually deductible? According to the IRS right now, you can write off the first 5,000 and then the rest have to be amortized over time. So for example, if you incur two $12,000 of expenses getting your business off the ground this year, and then you start business, which we'll come to in a minute, and you're ready to write these off, your accountant can write off the first five grand in one fell swoop and then take the other seven grand and put them into a bucket and start to write them off over time. The amortization period is 15 years. You may think that's a long time, but if you ever close down the business, they rush forward and you get to write them off the day you close your business until then, you have to write them off over time. Fourth and final point. When are you in business? When does that startup mode end and your business start? Well, it's when you make a sale. So let me use an example. Any of you that have listened to me before know I love a lemonade stand. Supportalemonade stand. Now if you go out and start your lemonade stand tomorrow and you're buying sugar and ice and building the sign and table and you're out there, are you in business yet? No. Not until you sell your first cup of lemonade. Now you may have spent 500 bucks getting the lemonade stand ready and sold your first cup of lemonade for a dollar. Now you can write off that $500. You've got $1 of revenue, 500 of startup. You've got a $499 loss on your tax return this year. That's how startup costs work. You could use that loss against other income as you meet with your accountant to figure out the best place to put it. But that is when your startup of your business is ends is when you make the first sale. So an important tax tip here is Go out and make some money. I can't write off your startup costs until you have a sale of a service or product. That's one of the best year end tax tips is getting out and making some money so we can capture your startup costs this year. So before December 31st, make some money. Thanks for watching and if you love that video, I've got a lot more. Please subscribe to my channel and I shoot weekly videos that can help you in your business, personal life and better live your American dream. Also, check out my newsletter. Free newsletter every week with blog articles, tips, strategies, tax deadlines. You'd love it. Also if you like social media, please follow me on social media with some daily tips and if you like to connect that way, it can be a lot of fun. But finally, please check out my tax and legal Library. I have 50 plus videos on these topics and more where I pull out a whiteboard and break them down. Hours and hours of helpful information that can better help you live in America. Control.
