Key Highlights
- Current Startup Tax Deduction: Currently, startups can deduct up to $5,000 in startup costs, with expenses beyond that needing to be amortized over time.
- Qualifying Expenses: Deductible startup costs include market research, advertising, employee training, salaries and professional services incurred before your startup business officially opens.
Kamala Harris’ Startup Tax Deduction Proposal: Harris proposes increasing the startup tax deduction from $5,000 to $50,000, allowing small businesses to have more flexibility in when they can claim the deduction, especially after generating profits.
Transcript
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Gene (00:02):
Hey everybody, it’s Gene Marks and welcome to this week’s episode of the Hartford Small Biz Ahead Podcast. Thank you so much for joining me. This week I want to talk about startup costs and the startup tax deduction. What exactly is it and why is it suddenly in the news? Well, just this past week, vice president and presidential candidate, Kamala Harris announced among certain plans for small businesses. One thing that got a lot of news, which was she wants to expand the startup deduction. She wants to expand it from 5,000 to $50,000. I’m going to explain that what she’s proposing in just a minute. But first, let me just make sure that we all understand what exactly the startup tax deduction is. And to do that, if you go to the IRS site, you will find, at irs.gov, a whole bunch of information about the startup tax deduction.
Gene (00:55):
What it’s meant to do right now is it’s meant to give the opportunity for startup businesses to write off some of the expenses that they incur when starting up a business, right? So these costs are like amounts paid or incurred in connection, in any connection with an existing activity engaged in profit. That’s how it is. So let, let’s talk about what some of these qualifying costs are that you can take advantage of if you’re starting up. A business number one, it’s a cost that you can deduct it if you paid it or incurred to operate an existing active trader business, right? So it, it’s one of these things is you’re starting it up. And some of these examples say you do, you get an analysis, or a survey done of potential markets or products or your labor supplier, a transportation facility, any research that you’re doing and you’re paying for outside experts or services to help you decide where and how and what to do when you start up your business.
Gene (01:58):
That would be allowed under the startup tax deduction. Any advertising that you do to advertise the opening of your business, special promotions and events and public relations, that would also be part of the startup tax deduction. Any salaries and wages for any employees who are being trained and their instructors also a startup expense. So, say you haven’t opened for business yet, but you’ve got your new employees and you’re going to be training them for a week or two. You’re going to be paying them salaries and wages as well as the cost of their instructors. That is tax deductible. You can do that as well. Any travel and other costs for securing customers, distributors, suppliers, any travel that again, in advance of starting up your company, that would be deductible as well. And then of course, the salaries and fees for executives and consultants, or for similar professional services, that you’re paying for people that are helping you again before you start up your costs.
Gene (02:57):
You start up your business. Now, there are some non-qualifiers as well, so, they don’t include like deductible interest or taxes or research and experimental costs. So just be aware of that. That is a generally not considered to be a startup cost. So why is this important? Well, when you have this startup deduction right now, according to tax law, this is federal tax law, you can deduct up to $5,000. Your first year, which is great that you start up your business. But in anything above that you have to amortize. And generally, it’s an amortization that you can do over a period of time. So, it’s usually an amortization period involved, which brings me to Kamala Harris’s proposal.
Gene (03:50):
She is proposing to increase this startup tax deduction by 10 folds. And she, her goal is to make that deduction from 5,000 to $50,000, right? So, again, for those same types of costs she would allow. Also new businesses, the flexibility in choosing when you can claim that deduction, right? I mean, they can wait now until you have profits. Right now, if you don’t have profits, you can’t take that deduction. But with her proposal, they can, you can actually wait until you do have profits and then you can then get the deduction at that point, right? Right now in her current law you can use the deduction to the extent that you have profits. And then you have to spread the remaining costs. Again, you have to amortize them, and it’s a 15 year period.
Gene (04:41):
So, she would still have that amortization thing, but again, it would be forever $50,000. So what’s the takeaway here? I don’t, first of all, this is her proposal. We don’t know if it’s ever going to become reality or pass, Congress will be part of tax legislation. We’re in election season now. So, it’s just, again, it, it’s one of our proposals. But it did bring a lot of create a lot of awareness about the startup tax deduction. because not a lot of startups know this, and you should know this, if you’re planning on starting up a business, any business, even if it’s a side gig and you have some of those startup costs that I mentioned before, research and analysis and surveys and some compensation or advisors or whatever, just remember as long as you’ve got profits in your business, you can deduct that against up to $5,000.
Gene (05:27):
So, in your first year, maybe that’ll be increased to $50,000, if her proposal goes through, maybe not. But the bottom line is though, is that you can take advantage of that startup tax deduction right now if you’re starting up a business. And if you weren’t aware of it, now you are. My name is Gene Marks. You have been listening to The Hartford’s Small Biz Ahead Podcast, and we’ve been talking about the startup tax deduction. I hope that it has been helpful for you. If you need any advice or tips or help in running your business, please visit us smallbizahead.com and you can get all the help that you need, including links to our prior podcast. Thanks for listening. I’ll be back with you next week with some other help and advice and tips for helping you to run your business. We will talk to you then. Take care.
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