If you’re one of the many motivated entrepreneurs out there looking to achieve the American dream through business ownership, don’t be surprised when you have to dig deep into your pockets to cover the array of initial and ongoing business expenses you’ll incur.
Fortunately, the IRS offers a silver lining when it comes to claiming tax-deductible business expenses when you file taxes each year.
According to the federal tax code, the owner of a limited liability company (LLC) can deduct startup expenses incurred by the business, no matter how the LLC is designated in terms of its tax structure.
To claim this business tax deduction, an LLC has to incur startup expenses before it formally becomes operational. Once the business is officially open, ongoing costs can be written off as well under the category of operating business expenses.
What Are Startup Costs?
As the name implies, startup costs are expenses incurred by an LLC owner in the very early stages of business development.
If you already have or plan to start an LLC, startup costs you can write off include the money you pay to create an LLC—or the money you spend to either investigate or actually purchase an LLC.
For example, you can deduct the costs you incur to survey a marketplace for your new business, money you spend on marketing to promote your “grand opening,” travel expenses you incur to get your business off the ground, and fees for training new hires in your office. In essence, startup costs are incurred before you make your first transaction with a customer.
What Are Organizational Expenses?
Organizational expenses are the required expenses involved in formally registering an LLC as a business entity. These costs include accounting fees, attorney expenses to help you draft and negotiate your LLC’s membership agreement, and other costs directly related to the paperwork that must be filed with state agencies.
Certain organizational expenses that cannot be deducted include investor solicitations and attorney fees for assistance with drafting customer contracts.
How Much Can You Deduct?
LLC members can deduct startup and organizational expenses incurred during a company’s first year of operation. However, there is a limit—no more than $5,000 of these LLC expenses can be deducted. LLC members must reduce this deduction by an amount of total costs that are in excess of $50,000. The amount that exceeds this $50,000 cap is considered amortizable.
Startup costs can be claimed as a write-off for the year in which they are paid. For example, startup business expenses paid in 2015 must be claimed on a 2015 LLC tax return when you file it with the IRS in 2016.
How to Amortize Startup Costs
Keep in mind that both startup and organizational costs are subject to amortization rules since they are classified as capital expenditures. As such, you must claim these deductions over the 180-month period that begins when an LLC becomes an active business. You can opt for an alternative amortization period, as long as it is not shorter than this 180-month period.
In order to amortize your business expenses, use Form 4562 and attach it to your initial LLC tax return that describes your company’s activities. In addition, you must attach a statement to Form 4862 outlining your business and each specific startup cost for which you elect amortization. It should also include the date the LLC officially became operational and the amortization period you are requesting.
Getting Help With Your Business Taxes
With so many expenses at play when opening a new business, it is critical to take full advantage of all the LLC tax deductions available to you, including the deduction of startup costs. These IRS write-offs can help you significantly reduce your tax liability when making your LLC tax filing, so you keep more of the hard-earned income your business generates.
When it comes to filing taxes, business taxes are a lot different than personal taxes. Partnering with an accountant who specializes in LLC taxes and other aspects of general business taxes can ensure you’re playing by the rules—while also saving you money.