Whether it's your first year as a startup or you're battle-worn after years in the trenches, you've learned to keep a close eye on your company's bottom line. When tax season rolls around, it's another opportunity to be strategic about maximizing your tax deductions in order to minimize the overall amount you pay.
However, this is one case in which you don't have to innovate, as there are a plethora of tax deductions that already exist. All you have to do is take advantage of any or all of the following write-offs that apply to your business.
Startup costs are literally the investments you made to physically start or open your business, including market research and analysis, marketing and advertising, employee training and professional fees associated with establishing your business structure and organization.
If your total startup costs are no more than $50,000, you may deduct $5,000 in business costs and $5,000 in organizational costs. If your costs were between $50,000 to $55,000, your correlating deduction is lowered. And, if your costs were greater than $55,000, you don't qualify for this deduction.
This tax deduction must be claimed the year that your business opens. If needed, there is also a six-month window for filing an amendment. Finally, if your business posts losses during its early years, you may choose to amortize these costs, deducting them over the course of several years instead.
If your gross annual receipts are less than $5 million, you can apply to use up to $250,000 of your federal R&D tax credit toward your Social Security and Medicare payroll taxes (employment taxes) each fiscal year for up to five years.
In other words, this dollar-for-dollar credit helps you offset some of the labor costs associated with your R&D process. You can claim your credit starting the first quarter after you've filed your tax return for the previous year. You have to specify the amount and unused credits can be carried forward.
In tax/financial speak, depreciation is writing off the cost of large purchases or investments in regular amounts over a number of years. Through a set of incentives designed for small business, you may claim a larger percentage, or, in some cases, all of the costs in the first year.
Through bonus depreciation, you can claim up to 50 percent of the cost of an item for the 2017 tax year. With the new tax law, this will rise to 100 percent in 2018.
Section 179 depreciation (first-year expensing) lets you deduct all or part of the costs of tangible personal property items like software, hardware, machinery and equipment used for your business at least 50 percent of the time.
Living up to the notorious complexity of U.S. tax law, the definition of tangible property is somewhat unclear. While it includes some capital items, it excludes others, like land, buildings and inventory.
For the 2017 tax year, you can claim up to $500,000 with a $2 million investment limit. Beginning January 1, 2018, the maximum annual expense deduction is $1 million, with rates adjusted annually for inflation.
The long and short of it is that with these rules, you can claim larger amounts than otherwise allowed. What to claim as bonus depreciation versus Section 179 depreciation is likely something you should discuss with a tax professional.
Although most entrepreneurs are pretty versatile, no one is an expert at everything. Thankfully, when you consult with professional lawyers, accountants, bookkeepers, growth coaches and others, in most cases, these costs can be deducted.
As the term “professional” is broad, this tax deduction also applies to consultant fees that stem from working with marketing and advertising agencies, engineering firms, software developers and any other type of professional, whose services are relevant to your business.