Tax Deductions for New Businesses

Business owner doing admin work on a laptop

If you’ve decided to start your own business, congrats! Welcome to the world of entrepreneurship. Coordinating all the startup and administrative details can be a bit overwhelming for new business owners. That’s why we’ve put together a guide to help you organize some of the deductible expenses you might come across when getting started. 

What expenses can new business owners deduct? 

The IRS allows business owners to deduct up to $5,000 (for expenses under $50,000) in the first year. If you happen to make a purchase over $5,000, you’re required to gradually write off the cost of that item over a 15-year period. 

Below, you’ll find examples of deductible expenses commonly incurred in the early stages of launching a business. 

Tax-deductible startup expenses 

Before you decide to open a small business, you may invest in conducting some research. The following are expenses you may come across during the pre-launch phase of your small business. 

  • Payments associated with market and product analysis  
  • Charges related to competitive analysis 
  • Costs to conduct feasibility studies  
  • Labor supply research expenses 
  • Travel costs related to starting your business  

Deductible expenses associated with launching your business  

After you’ve done the initial research, it’s time to organize the most critical logistics. Such costs include: 

  • Labor (recruiting, hiring, training, salaries/wages, benefits, etc.) 
  • Rent 
  • Costs associated with securing suppliers 
  • Advertising and promotion costs 
  • Equipment and software subscription fees 
  • Other professional fees 

Organizational costs to note when starting a new business  

Other administrative costs to consider: 

  • LLC setup, permits, and other licensing fees  
  • Federal, state, and local fees 
  • Accounting fees 
  • Borrowing costs 
  • Other fees 

More tax deductions for new business owners to know 

There are other deductible expenses that new business owners should keep track of as well. These costs often slip through the cracks – don’t forget day-to-day expenses for things like: 

  • Vehicles used for business purposes (new truck, car, automobile, mileage) 
  • Insurance (healthcare, general liability, workers’ compensation) 
  • Office expenses (pens, paper, home office setup) 
  • Inventory (your product and/or materials needed to make the product) 
  • Travel (flights, hotel, parking, rental car) 
  • Meals (office snacks, company-wide parties, entertaining clients) 
  • Training (education, certification) 

Check out our Tax Prep Checklist for the Small Business Owner for more tax-deductible business expenses you may be missing. 

Deduction adjustments for tax year 2022 

There are several tax law changes that may affect what and how much you can deduct in 2023.  

  • Coronavirus (COVID-19) related provisions – A majority of the tax law adjustments created in response to the pandemic will revert to pre-pandemic parameters in tax year 2022. For more information on these changes, read Tax Law Updates to Know for 2023. 
  • Employment-related taxes – FICA, FUTA, and unemployment taxes are 100% deductible. 
  • Net Operating Losses rules – This allows a taxpayer with a loss in one year and income in another year to deduct the total of the NOL carryovers for that year, plus the operating loss carrybacks to said year. Alternatively, taxpayers can choose to deduct 80% of taxable income without regard to the allowable NOL deduction.  
  • Excess Business Loss limitation – This prevents noncorporate business owners from deducting losses greater than $270,000 (or $540,000 for married filing jointly).  
  • Interest expenses limitation – Starting in tax year 2022 (taxes filed in 2023), businesses will have restrictions on how much interest they can deduct. Business owners can deduct a maximum of 30% of their adjusted taxable income. 
  • Excise tax – The Inflation Reduction Act calls for a 1% excise tax on buybacks. 
  • Employee salary reductions – The dollar limit for employee salary reductions for contributions to health Flexible Savings Accounts (FSA) increases to $2,850. 
  • Medical savings accounts – The maximum out-of-pocket expense for employees with individual coverage in a medical savings account increases to $4,950. 
  • Research and development (R&D) expenses – In year one, only 10% of R&D costs are deductible. Going forward, businesses would need to amortize certain expenses over a five-year period.  

Frequently Asked Tax Deduction Questions: 

How much can I deduct for my new business? 

The IRS allows business owners to deduct up to $5,000 (for costs under $50,000) in the first year. After the first year, business owners must amortize their business over a 15-year period.  

Can I claim my new business on my tax return? 

If you’re launching a business, you can deduct certain business-related expenses on your tax return, but there’s a catch. If you decide to start your own business, then realize you no longer want to pursue that venture, you can’t write off those expenses because your business is no longer active. 

I just bought an existing business. Can I deduct its expenses in the first year of ownership? 

Yes. Even though you aren’t starting a business from scratch, you can still take a deduction within the first year of owning a newly acquired business. The IRS allows a buyer of another business to take a deduction of up to $5,000 for expenses under $50,000. But, like with starting new businesses, if you make a business-related purchase over $5,000, you must amortize that purchase over a period of 15 years. 

Are LLC startup costs tax deductible? 

LLC startup costs are subject to specific limitations. If your expenses meet the requirements listed above, then you can write them off. But startup costs don’t include taxes, interest, or R&D costs.  

Can I get a tax refund if my business loses money? 

It depends. Business losses do not always result in a tax refund. Your tax refund will still be based on your adjusted gross income, tax filing status, taxes you’ve paid throughout the year, etc. 

How to claim tax deductions for a new business 

Once you begin your return and finish entering your basic info, you will be prompted to enter your income, business expenses, and more. TaxSlayer will take you through each step to ensure you get every possible tax break you deserve. To see how we can cut your tax bill, create an account or log in to start your return today. 

This article was last updated on 12/22/2022.

Disclaimer:
This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.

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