If you are a startup owner, knowing which expenses qualify for deductions and how to claim them can substantially impact your financial health in the early years. The US Internal Revenue Service (IRS) offers a range of deductions for initial setup costs, marketing expenses, and operational overhead that can reduce your taxable income and free up resources to invest back into your business.

Below, we’ll break down the fundamentals of startup tax deductions and the best tactics to help you maximize them. We’ll explore which expenses you can claim and helpful methods for tracking and reporting.

What’s in this article?

• What are business startup tax deductions?
  
• How to deduct prelaunch expenses for your startup
  
• What business assets qualify for depreciation?
  
• How to deduct marketing and advertising expenses for your startup
  
• How to track and deduct travel and meal expenses as a new business
  
• What startup costs can be amortized over time?
  
• How to claim a home office deduction if you run a startup from home
  

What are business startup tax deductions?

Business startup tax deductions are deductions for certain expenses incurred before the official launch of operations. These deductions cover costs related to establishing a new business, such as market research, advertising, employee training, and legal fees.

How to deduct prelaunch expenses for your startup

To deduct prelaunch business expenses, organize your expenses, sort them into categories, and report them to the IRS. Here’s how to get started:

• First, break down your costs into startup expenses and organizational costs. Startup expenses include market research, initial advertising, and staff training, while organizational costs include legal fees for setting up an LLC and incorporation fees.

• Next, add up all eligible expenses in each category. Only costs explicitly tied to getting the business ready for launch qualify here, so avoid including any other line items.

• For the first year, you can deduct up to $5,000 each for startup and organizational expenses. But monitor the total. If total costs exceed $50,000, the $5,000 deduction is reduced by the amount your total startup or organizational costs surpass $50,000.

• For costs beyond the $5,000 first-year cap, you’ll spread out the deductions over 15 years (starting the month your business officially launches).

• When tax season comes, include these deductions on your business return. The exact form varies based on your business structure (e.g., sole proprietorships and single-member LLCs use Schedule C).

What business assets qualify for depreciation?

Most equipment purchases aren’t deducted the same way as other business expenses; instead, they depreciate and are written off over time. To qualify for depreciation, business assets generally need to be tangible items with useful lives that extend beyond a year. Here’s a rundown of the types of assets that are typically eligible:

• Office equipment: Computers, printers, copiers, and other equipment necessary for daily operations

• Furniture and fixtures: Office desks, chairs, cabinets, and even lighting

• Machinery and tools: Manufacturing or industrial machinery, tools, and other production-related equipment

• Vehicles: All business-owned vehicles, although there are specific rules if the vehicle is used for both business and personal purposes

• Buildings and real estate: All physical business properties, such as offices, warehouses, and retail spaces, but the land itself is not depreciable

Intangible assets such as patents, trademarks, copyrights, and franchises don’t depreciate in the traditional sense but can be amortized over time. By amortizing them, you spread out the deduction over time, which can help smooth out taxable income over the early years of your business.

How to deduct marketing and advertising expenses for your startup

Marketing and advertising expenses are generally considered ordinary and necessary for business operations, which means you can deduct them as business expenses. Here’s how to do so:

• Identify qualified expenses: Start by identifying all your marketing and advertising costs. These include online ads, social media campaigns, branding expenses, website design, and traditional advertising such as flyers, billboards, and print ads. Any effort to promote your brand or attract new customers counts, including professional photo or video shoots for campaigns and even the cost of promotional swag.

• Separate startup costs from ongoing costs: Some of these costs might fall under startup expenses if you’re still in the prelaunch phase. Once your business is up and running, all marketing expenses are deductible for the year they’re incurred as part of regular business expenses.

• Keep detailed records: Maintain precise records of every marketing expense, including invoices, receipts, and bank statements, as well as a brief description of each item or service.

• Report expenses on your tax return: When you file taxes, list these expenses as “Advertising” or “Marketing” on your business tax return. If you’re a sole proprietor or single-member LLC, you would use Schedule C, while a corporation would use Form 1120.

How to track and deduct travel and meal expenses as a new business

If your new business has incurred travel and meal expenses, you can deduct them if you have a detailed record of them and if they meet IRS requirements. Travel expenses are eligible as long as a trip is primarily for business, not personal, reasons. If you’re mixing business with a personal trip, only the business-related expenses are deductible. If you add a couple of personal days to a work trip, deduct only the expenses tied to the business portion. Here’s a closer look:

• Deductible travel expenses: Deductible travel expenses include airfare, hotel stays, car rentals, and taxis—anything necessary to get you where you need to go and keep you there for business purposes.

• Deductible meal expenses: Meal expenses are deductible only if they happen during business travel or a business meeting. They need to be directly tied to business, so your lunch out on a personal day doesn’t qualify. Typically, you can write off 50% of business meal costs, although there are occasionally special rules (e.g., temporary 100% deductions for some meals). Monitor the latest IRS updates.

• Deductible mileage: Mileage can be a business deduction too. When you drive for business purposes, log your miles separately. And if you frequently use a car for business, use a mileage tracker app to automatically tally business miles.

Here are some tips for how to catalog these expenses and log them when you file your taxes:

• Keep records: Keep detailed records of all these expenses. Save every receipt, whether it’s for a plane ticket, a hotel, or a meal. Digital copies work too, as long as they show the date, amount, and reason for the expense.

• Use bookkeeping software: Bookkeeping apps such as QuickBooks and Expensify let you categorize expenses, upload receipts, and even track mileage to keep your records organized. On every receipt or in your expense tracking system, note why it’s a business expense (e.g., “Client dinner in San Francisco”).

• Report expenses: When you file taxes, travel and meal expenses are reported as “Travel and Meals” on your business tax return.

What startup costs can be amortized over time?

Startup costs that prepare your business for launch but exceed the $5,000 first-year cap can be amortized over 15 years, which means you spread the deductions out rather than take them all at once. Here’s a look at which startup costs typically qualify for amortization:

• Market research and analysis: This includes any research you did to understand your target market, competition, or customer base before launch. For example, hiring a research firm to conduct surveys or analyze the industry would qualify.

• Prelaunch advertising and promotions: These include any initial advertising costs to build awareness. Preopening ads, social media marketing, and press releases can all qualify.

• Employee training: This includes any employee training for opening day, such as fees for materials, instructor fees, and facility rentals.

• Travel costs related to launch: All expenses for travel to secure clients, vendors, or suppliers before the business is operational can be amortized. These can include airfare and accommodations.

• Consulting and professional services: Fees for consultants, attorneys, or accountants as part of the initial setup phase can also qualify. Among the most common examples are legal fees for drafting contracts and accounting advice for establishing financial systems.

• Organizational costs: Expenses tied to establishing the business’s legal structure—such as state incorporation fees, drafting partnership agreements, and fees for forming a corporation or LLC—qualify for amortization.

How to claim a home office deduction if you run a startup from home

Claiming the home office deduction can be a smart way to reduce your taxable income if you’re running your startup from home. In order to be eligible for this deduction, the space you’re using must be exclusively and regularly used for business. A dedicated home office that isn’t also used for personal activities qualifies, but a kitchen table used by the whole family doesn’t. The home office should be your principal place of business, which means it’s where you manage or direct your startup’s operations, even if you occasionally work elsewhere. If you’re eligible for this deduction, here’s how to calculate and report it to the IRS.

Choose your deduction method

The IRS offers a straightforward option: you can deduct $5 per square foot of home office space up to a maximum of 300 square feet for a maximum deduction of $1,500. This method is simple to calculate and requires less recordkeeping.

You can also use the actual expense method, which calculates your deduction based on actual home expenses (e.g., rent, mortgage interest, utilities, maintenance) multiplied by the percentage of your home used for business. This can yield a larger deduction but is more labor-intensive.

Calculate your deduction

Carefully track all relevant expenses, including rent, mortgage interest, property taxes, utilities, repairs, homeowner’s insurance, and any direct expenses for the office space, such as painting and decorating.

For the actual expense method, calculate your deduction by measuring the square footage of your home office and dividing it by your home’s total square footage to find the business use percentage. Then, apply this percentage to your total home expenses. For example, if your home office is 200 square feet in a 2,000-square-foot house, your business use percentage is 10%.

Report your deduction on your tax return

If you’re a sole proprietor or single-member LLC, use Form 8829 (Expenses for Business Use of Your Home) and Schedule C to report your home office deduction. The IRS allows only one home office deduction per business; if you operate multiple businesses from the same home office, only one can take the deduction.

Keep thorough records

It’s important to document everything. Keep photos of your home office, copies of utility bills, and any receipts for improvements or maintenance of the space. Using this deduction can be a valuable break, especially in the early years of your startup, so it’s worth considering if you qualify.