Are LLC Startup Expenses Tax Deductible? by Brette Sember, J.D.

Are LLC Startup Expenses Tax Deductible?

The expenses you incur as you set up your LLC are tax deductible, though you need to know important limits, exceptions, and rules to legally deduct these costs.

by Brette Sember, J.D.
updated February 18, 2021 · 2 min read

 

Fortunately, many startup expenses are tax-deductible when you form a limited liability company (LLC). However, you need to know the rules to qualify.

Here's what you need to know.

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Three Types of Deductible Expenses

Under the tax code, you can deduct three types of expenses related to the launch of your LLC.

  1. Creating or investigating a business. Any costs you incur related to creating your business, investigating a business you wish to create, or investigating a business you are considering buying are deductible. These costs include things like becoming familiar with the market for the business' products or services, checking out potential business locations, or becoming informed about the labor market available to the business.
  2. Getting the business ready to open. Once you've decided to go ahead with the business, you will spend money before you even form an LLC or open your business. These costs are deductible. Any cost except for purchasing business equipment is included in this category. Possible expenses include services such as marketing consultants, labor force training, travel, and advertising.
  3. Organizing the business. If your LLC has at least two members then you can deduct these expenses related to organizing your business, such as the legal services and state fees involved in forming the LLC. Since you must pay these before you open your business bank account, they come out of your personal funds. Also included in this category are salaries for temporary directors and the costs of holding meetings for the business principals.

What Are the Limits of Startup Deductions?

The Internal Revenue Service (IRS) limits how much you can deduct for LLC startup expenses.

  • If your startup costs total $50,000 or less, you are entitled to deduct up to $5,000 for startup organizational costs.
  • If your costs are between $50,000 and $55,000, you can deduct $5,000 minus the difference between $50,000 and your total startup costs.

However, since many businesses do not show a profit in their first year, you can amortize the remainder of these costs moving forward. Use IRS Form 4562 todo this. You can amortize these costs over 15 years.

Special Rule for One-Person LLCs

LLCs with two or more members can amortize their startup costs. One-member LLCs are not permitted this luxury.

If your LLC has only one member and your startup costs are $5,000 or less, you may deduct $5,000 in organizational expenses in your first year. If your costs exceed this amount, though, you have to capitalize all of these expenses and they are not deductible until you dissolve your LLC.

Taking all the deductions, you are entitled to will start your LLC on the right foot and set the stage for success.

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Brette Sember, J.D.

About the Author

Brette Sember, J.D.

Brette Sember, J.D. practiced law in New York, including divorce, mediation, family law, adoption, probate and estates, … Read more