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Can starting a business help with my taxes?

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by Simplice Essou, CPA | July 29, 2022

Starting a business can be exciting. However, there is a lot of planning and preparation required before launching. One of the issues that a business owner needs to keep in mind is the tax implications of starting a business.

Most people who are planning to start a business often wonder how it will affect their personal taxes. The reality is that starting a small business can potentially lower your tax bill by thousands of dollars.

Tax deductions for starting a business

The costs incurred to start your business are capital costs. These are costs incurred before the start date.

When opening a business, you can claim deductions for expenses such as housing, depreciation of equipment and vehicles, utilities, and cost of goods sold (for manufacturing or retail businesses).

Start-up costs are part of capital costs; these are the costs that the company incurred before starting to sell to customers and clients.

Most capital expenditures are not deductible, however, under current IRS regulations, a company may elect up to a total of $5,000 in start-up and organizational expenses in the year of commencement. However, this applies only if start-up costs are $50,000 or less.

The $5,000 deduction is reduced by the amount of start-up costs or organizational expenses that exceed $50,000. Any start-up or organization costs in excess of $5,000 can be amortized (prorated) over 180 months.

There may be additional rules that affect your business, so be sure to consult a professional tax advisor while you are planning your business, especially if you intend to invest a significant amount of money. Tax law is complex and some decisions are irreversible.

Current expenses for operating tax deductions:

Once the business is open, the business can take additional deductions such as:

  • Expenses for cars and trucks: Part of the expenses for cars and trucks related to business activities is deductible. For example, gas and car repair costs are deductible.
  • Home office expenses: If a business owner uses a special room in their home to conduct business, depending on the type of business entity, a deduction may be made for home office expenses.
  • Travel expenses: For business trips, travel expenses are not deductible.
  • Food and entertainment: When receiving clients to discuss the case, expenses incurred are deductible.
  • Computer and internet costs: Computer and Internet expenses necessary to run a business are deductible.
  • Telephone costs: Telephone expenses incurred for business purposes are not taxable.
  • Computer software: Expenditure on computer software incurred in the conduct of business is not taxable.
  • Office expenses and supplies: Office expenses incurred as well as business stationery are not taxable.
  • Insurance premiums: Business insurance premiums are tax-free.

Using tax preparation software can help you find deductions you can claim.

These deductions reduce net income, which directly affects the taxable income of the owner(s). Let’s take the example of an LLC or S Corporation owner. Taking deductions for business expenses reduces the taxable income of the business. Because LLCs and S corporations are pass-through entities, this reduction in taxable income or loss will have a direct effect on the personal taxable income of the owner(s).

Starting a business can help with taxes. However, it depends on many factors such as: incorporating your business, choosing the right organization (S-Corp, C-Corp, Partnership, LLC) and hiring a good accountant. When in doubt, be sure to get a professional to guide you through the process.

Simplice Essou

Florida SBDC at USF
Specialization: accounting, business planning, financial management, startup

Simplice Essou joined the Florida SBDC at the University of South Florida in March 2020 as a business consultant, bringing nearly two decades of experience in accounting, finance and entrepreneurship. Esu founded and managed an international consulting firm in 2008, specializing in advising African governments on matters related to the development of small and medium-sized businesses. He previously worked for major corporations, including Bank of America, BP-Amoco, General Electric and Lehman Brothers. These roles gave him extensive experience, including the ability to forecast, analyze revenue, proactively communicate accounts receivable risks, and lead daily credit loss analysis and reporting. He earned an MBA in finance from the Wharton School at the University of Pennsylvania and a bachelor’s degree in accounting from the University of Southern Mississippi.

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