Are you getting your brand spanking new business setup and worried that you might be missing some key tax deductions? Maybe you’re not even SURE what you should be writing off at this stage in your business… All you know is that you’ve been spending A LOT and hope there’s a tax write off light at the end of the tunnel.
Oh, my friend, there is a BIG BRIGHT light at the end of the tunnel! I’m sharing 6 tax deductions that new business owners forget to write off and examples of the types of expenses that fall in these categories.
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When you Can Deduct (3:41)
When can you start writing off your business expenses? What are some guidelines and rules around this? What happens if you start spending money in one tax year, but your business hasn’t officially started in the next tax year?
First, you don’t need to be making money from your business to write off your expenses. This can mean two things. Let’s get into some language that is used for small business owners in the startup phases.
The Start-Up Period
You can write off up to $5,000 in expenses for a business that isn’t operational yet. These are called startup expenses, which are expenses incurred BEFORE the business is operational. A lot of people start businesses on January 1st, but they’re spending money leading up to that point.
In the eyes of the IRS, a startup period is the time in which you’re planning and developing your business. You’re figuring out all of the different pieces and how they’re going to work together. Maybe you’re building a website or purchasing software like Photoshop. You aren’t actually open for business, but you’re spending money.
You can only write off startup costs if you start a business. You can’t just decide one month, “I want to start a landscaping business!” so you buy a bunch of landscaping stuff, which you try to write off later on. Then the next month you’re like, “Actually I didn’t want to start that business. I’m going to start something new.”
That’s the thing with these startup costs- the business actually has to be operational at some point in time.
If you have startup expenses, talk to a tax advisor about HOW to write them off. There are a lot of rules for claiming startup expenses. Don’t worry! You can totally claim them and write them off, but your tax advisor will help you figure out the best way to write off your expenses.
Now, you may be thinking, Okay, I’m going to have these startup expenses in 2018 for businesses starting in 2019. What should I be doing?
Track all of your startup expenses! Even if you’re not quite sure of all the logistics, just keep track of the money you’re spending.
The Operational Period
What comes next is the operational period of your business, which is when you begin to offer products and services to the public. You don’t need to sell these products and services, and you don’t need to be making money. You just need to have an offer out there.
When you enter into the operational phase of your business, your expenses are no longer startup expenses. They just become regular business expenses and tax deductions. All the rules about startup expenses are out the window and instead, you’ve just got sweet sweet writeoffs.
Now let’s talk about overlooked tax deductions for new businesses.
Consultants and Subcontractors (11:26)
A consultant is anyone you hire to advise you on your new business. Keep in mind, your business could be operational or you could be in the planning and development stage. Regardless, if you hire people to give you advice on anything that has to do with your new business, you can write that off.
Go back to when you first had your idea for your business, did you hire anybody to advise and consult with you about that idea? That’s a tax deduction!
Next are subcontractors. This is anyone you hired to perform a service for your new business. This could be something like hiring a graphic designer for your brand identity, a web developer, or even movers to help you move into a new office.
Bank and Loan Fees (13:49)
Oh my gosh! Everyone forgets about these pesky fees! I like to break them out into these sub-categories:
Bank fees are any fees that your bank charges you related to your business bank account, like a new account setup fee, wire transfer fees, or an account maintenance fee. If you’ve set up a bank account recently, go back and check to see if you have any of these fees.
Loan Fees & Interest
Generally, if you take out a loan, there’s some sort of loan setup fee. If there are set up fees related to taking out that business loan, that is a tax write off!
And don’t forget about your loan and credit card interest! All of that interest you pay every month is a tax deduction as long as it’s for business purchases, business accounts, business loans, or business credit cards.
If you’re scratching your head like, “Oh my gosh, I missed six months of interest!” … go back through your statements and find those finance charges and start keeping track of them.
Business Formation Costs (17:30)
Starting a business isn’t free…but at least you can write off the costs! Business formation costs are expenses related to forming your business. These are called organizational fees. This can be stuff like your state filings and entity setup fees.
You can also write off any licenses or permits you’re required to have to perform your services or sell your products. For example, when therapists get licensed they have to pay their state licensing board a fee. That fee keeps their business operational and is a tax deduction.
Here’s another example: Tattoo artists have to get certain permits from the Department of Public Health in order to offer tattooing services within their space. They also have to obtain certifications showing that they understand health and sanitary procedures. These permits and certifications are a write-off.
Product Development (21:57)
We don’t just create products out of nowhere, especially if you have a physical product. There’s always some sort of developmental aspect to creating a product and product development fees related to researching and developing new products.
For example, you make jewelry and you’ve been experimenting with a couple of designs, trying to figure out which materials are going to work best.
Or maybe you make body lotion with essential oils. You’re trying to decide between two brands of oils, and which smell lasts the longest.
A lot of times, we do research and development before our business becomes operational since we’re perfecting our products. All of those costs are a tax deduction under product development and include the construction, ingredients, packaging of the product and researching similar products.
These are expenses related to promoting your new business. If you’re building buzz around your business by purchasing marketing materials or advertisements, then that is considered a write-off!
Some examples of advertising are a sign in the front window of your business that says “opening day is next week!”, ads in your local newspaper, and your website. Then we have digital ads, such as Facebook ads to get your audience to sign up for your pre-launch email list.
We also have promotional materials, which is anything that has your name or logo on it. That includes fliers, business cards, or pamphlets.
These are expenses related to business travel. A lot of people forget to write off business trips that pertain to the planning and development of their business.
Here’s how I like to break down travel expenses:
- Airplane tickets
- Taxis, Lyfts, and public transportation
- Hotels, Airbnb bookings, and VRBOs
Then there’s local transportation. This could be traveling to local venues or stopping at the post office to pick up inventory items. Maybe you’re meeting with business partners or collaborators at a local coffee shop or restaurant. These are costs associated with getting around your local area.
There you have it! Six tax deductions that most new business owners forget they can write off!
There’s no way I could go through every single tax deduction. I do have a little gift for you if you want to learn more about all the different types of tax deductions! This is a great starting place for you.
Download the Tax Deduction cheatsheet and get a full list of tax deductions for your business!