If you start a small business you could pay substantially fewer taxes on your family’s income. This is true, regardless of your new business’s profitability.
Starting a small business can legally save you thousands of dollars in taxes on you (and your spouses) full-time job incomes. Because businesses can claim tax deductions for housing, utilities, transportation, travel, and computer equipment.
The American government wants to stimulate the US economy, so they generously give tax deductions for business startup costs and operating expenses.
Keep reading to learn about the IRS regulations regarding home businesses, side hustle gigs part-time businesses allowed tax write-offs and cautions on how to prove that your business is not merely a hobby (of which deductions are not allowed).
Expenses Tax Deductions for Starting a Business
There are two types of expenses that you can deduct from your taxes – startup costs and ongoing operating expenses.
Startup Cost Tax Write-Offs
The IRS allows three types of startup costs eligible for tax deductions (IRS source). You can only write them off of your taxes if you actually opened the business.
- Creation – Costs for research, competitor analysis, surveying markets and visiting possible business locations. These costs can be associated with creating a new company or investigating an existing business for investment consideration.
- Preparation – Costs for opening your company such as equipment, employee training, travel to suppliers, advertising and marketing expenses, business cards and legal fees.
- Organizational – Expenses for incorporating your company, registering trademarks, salaries for company directors and accounting fees.
The IRS allows you to deduct up to $5,000 business startup costs and $5,000 in organizational costs totaling $10,000 BUT only if your total startup costs are $50,000 or less.
If your startup costs are over $55,000 you are not allowed these deductions. These monies can be applied to reduce your taxes in the year before you open your business in the following year.
Naming Tips: How to Come Up with a Catchy Business Name
Business Operational Tax Deductions Expenses
Once your business is open for customers your list of tax deductions expands dramatically to include these expenses:
- Car transportation – You can deduct a portion of your car expenses (including gas and oil) when you use your vehicle for business purposes such as traveling to customers, suppliers, trade shows and delivering merchandise.
- Housing – If you have space in your home that you have dedicated to your business you can deduct the costs of that space (including mortgage, insurance and property taxes) from your taxes.
- Utilities – Dedicated phone lines for businesses are legal deductions as are costs to heat and cool your home business.
- Travel Entertainment – If you travel to trade shows, customer presentations and to suppliers, your travel expenses can also be used as tax write-offs.
- Eating Out – If you hold business meetings over dinner you can deduct 50% of the cost of restaurant meals.
- Computer Equipment & Furnishings – Section 179 of the IRS tax code allows up to 100% of computer equipment to expense annually up to six figures. This is good news since it means that your new computer can be deducted in the same tax year.
- Computer Software
- Office Supplies
- Insurance Premiums
Best Businesses To Start for Save on Your Taxes
The best business ideas where you can get easy tax write-offs to include:
- Consulting – Can be home-based where you travel to your customers, or consult via telephone and internet. Deduct costs for home office space, telephone lines, internet access fees, and computer equipment. Find your perfect consulting company name on my list
- Internet – Website designers, coders, programmers, e-commerce store owners, online advertising agencies, website copywriters. Read about my best online business ideas
- Handmade Artisan – Create crafts and art to sell in galleries, craft fairs and online. Deduct expenses for materials and supplies, travel to fairs and education. Get ideas for your craft business name on my list
- Services – Offer services for tutoring, organizing, event planning, carpentry, and hairstyling. Deduct all your equipment, material costs plus your cell phone, tools and trucks.
Yes, the IRS allows you to deduct up to $10,000 ($5,000 in startup costs and $5,000 in organization costs – such as incorporation) from your personal taxes a year prior to opening your company. Then in the same tax year that you open your doors, you can also deduct additional ongoing expenses such as home offices (mortgage and utilities), transportation, travel, supplies, advertising costs, and equipment.
Yes, you get credits to your tax bill payment by deducting your startup and ongoing business expenses.
The IRS will define your company as a business if you “carry on the activity for the production of income from selling goods or performing services.” As a startup entrepreneur, you must be careful to define your business as ongoing trade and not a hobby. This is crucial because hobby expenses are not allowed tax deductions.
To prove that your business is not a hobby follow the rule of 3 out of 5. This is a way the IRS uses to determine profit motive (even if you don’t make a profit right away). The rule is that if your business made a profit for any three of the past 5 consecutive years your company is not just a hobby. So don’t claim a loss for the third straight year to avoid risking an IRS tax audit.
Another way to prove to the IRS that you are running a legit business is to demonstrate evidence that you are trying to make money. Your website, your accounting books and a separate bank account all are proof that you are endeavoring to create a profitable business.
Considering starting your business in Delaware to save taxes? Read about the benefits and risks of starting a business in Delaware in my article.
Naming Tips: How to Come Up with a Catchy Business Name
Source: Quickbooks Online
Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.