Starting a business can be expensive. Entrepreneurs often face the multiple costs of organizing their business as well as setting up facilities for retail or commercial work to be done. And it may be some time before the business even begins offering goods or services in order to earn an income.
One way that you can find help with these early expenses is by taking advantage of tax deductions specifically designed to encourage new businesses. Here are three steps you can take in order to use these to the full:
1. Differentiate Between Expenses
The first step in claiming any kind of deductible item is to keep track of it separately. The IRS allows most new businesses to deduct up to $5,000 of organizational expenses and an additional $5,000 of start-up expenses. This provides you the ability to counter $10,000 of first year income with no tax consequences.
To maximize your deduction, track both types of payments separately. Organizational costs are those related to setting up the business entity — things like legal fees, registration with the state, or meeting with partners. Start-up expenses involve beginning the working business, such as meeting with vendors, advertising, and training staff. If you track these to their proper categories, you have more room to deduct more expenses.
2. Choose the Right Expensing
Expensing is a bookkeeping term that generally refers to the ability to deduct an item as a current expense rather than to capitalize it and spread out the tax benefits. For start-up costs, this means that you can choose how much of a tax benefit you want in the first year and how much you want to save for future years.
How can you strategically deploy expensing? If you have little income in year one, you may not want to use the entire $5,000 deduction when there's nothing to put it against. In this case, you could amortize the entire balance over up to 180 months and use the deduction when you do have taxable income. You may also want to split the benefits by fully expensing organizational costs while stretching out start-up costs.
Finally, don't forget to continue to use your deduction throughout the next few years.
3. Work With an Accountant
Keeping track of early expenses and knowing how to use them for maximum effect can be challenging for new business owners. Your best bet for money savings is to work with an experienced accountant or a business bookkeeping services company. He or she can guide you during these crucial stages so that you build your business on a sound financial footing. Why not make an appointment today?