Can I Deduct Start-Up Costs?

Pre-LLC or PC

You don’t have to wait until your LLC or your PC is actually formed in order to start
incurring expenses that are deductible on your taxes. If you are getting ready to
start a business, the IRS knows that some of those initial start-up costs or
preparation costs are going to come from your own personal funds or that of the
other owners in the business. They’ve allowed for that and have rules on what can
and cannot be deducted prior to the date of incorporation. A lot of the start-up costs
are definitely deductible.

Allowable Expenses

Allowable pre-formation expenses include those related to investigation, such as
traveling to look at different office locations, even if you have to fly there, other
preparation costs like employee training or purchasing inventory. Organizational
costs are another category, like fees you pay the state for forming your business, or
legal fees, such as hiring an attorney, or money spent for other help to actually form
the business or incorporate it in your state.

Start-Up Costs

Start-up costs are one-time expenditures that are strictly linked to the opening of a
new business. Most of the time start-up costs are tax deductible so you should keep
good track of these expenses that are incurred before you have a business account
to track them automatically or on a business credit card.

Start-up costs you can deduct prior to forming a LLC or PC:
 Investigation and preparation costs
 Advertising & Advertising Agency fees (if you start advertising before you are
formed)
 Permits that are state and local
 Start-up financing: loans & investments
 Insurance policies
 Construction costs (if you have to build a new office space)
 Signage
 Web hosting, web domain, web site creation
 Office utilities: Internet, phone
 Employee training
 Supplies: Desk telephone, laptop
 Inventory: shipping supplies, business cards
 Organizational costs: state LLC fee, legal fees for business formation,
governmental business establishment fees (state, local, or federal)

Although these may be normal costs associated with business if you purchase before
you are incorporated, they are start-up costs. Once you are incorporated, they
become organizational costs, costs that are typical day-to-day costs of the business.
Note: Don’t consider a sole proprietorship. The IRS does not allow start-up costs to
be deducted for sole proprietorships.

CPA/Bookkeeper/Tax Professional

If spending for a business, keep receipts for everything that you might think is
related to the start-up of your business and take them to a bookkeeper and a tax
professional as well. Let them guide and help you. There’s more than you think so
keep all your receipts.

You should definitely have a CPA. Many CPAs offer bookkeeping services as well.
You will need a team of people to help you grow your business. No one can be
everything.  They’ll save you money and they will actually pay for themselves in a lot of cases, especially in the early years.

Start-Up Cost Limits

How much can you deduct for start-up costs? (Always check with a CPA)
 Investigation & Preparation Costs – $5,000
 Organizational Costs - $5,000
There are more nuanced rules, caps, and categories so keep in mind you can spend
$5000 just for some of the things you would ordinarily do to start the business, And
then $5000 for coaching or an attorney to help you for organizational costs. Now
larger expenses, like purchasing a building, or paying up front for an annual lease
payment, may be able to be deducted as well so check with your financial
professional.

No Income – Loss

You may have a brand new business and there’s no income for that first six months.
If you can show the IRS
 it’s a pretty small business,
 that you are working towards generating income, and/or
 that something isn’t working and you are changing strategies to get income,
you can deduct business expenses and call it a loss on your income taxes and maybe
offset other areas of income in other areas of your life, such as W-2 wages. Double
check with your CPA or tax professional.

Note: You can only do this if there is no income for a short period of time. Otherwise,
the IRS will start to wonder whether you have a business or a hobby.

Hobby Income

If you are engaging in a business that isn’t generating any income after a couple of
years, the IRS might say that your business would be more appropriately classified
as a hobby.

For example, you are a part of a jazz band where you get paid for a gig every Friday
night. That might be more like a hobby. There are a number of criteria the IRS uses
in order to make that determination. Be aware that you can’t just start a business
and deduct losses forever and ever. Check with IRS and tax professional.

Conclusion

Don’t let not having a LLC stop you from getting started in business, growing, and
getting things ready for when you are ready to see patients walk in your door.  Keep following us on our platforms for more guidance. Head to Functional Lawyer's YouTube, Facebook, and Instagram to stay up to date.