Deducting Startup Costs
A common question from our newcomers is about the eligibility of deducting expenses incurred before their official S Corp start date.
Great news—these startup costs are indeed deductible! The IRS provides clear guidelines on how to handle these expenses, so let's dive into what you need to know to apply these rules effectively.
An Example Scenario
Let's consider a scenario involving Max, who is enthusiastic about launching his marketing consulting business. He joins Collective in July and plans to officially start his business in October, choosing October 1, 2023, as his S Corp recognition date with the IRS (Box E date on his form 2553).
In preparation, Max incurs various expenses from July to October. These might include purchasing a new computer, subscribing to necessary software, business-related meals, and fees for setting up his business through Collective.
When Max meets with his onboarding accountant, it's crucial he includes these pre-operational expenses in his company's books.
Reporting Startup Costs
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Startup costs under $50,000: You can deduct up to $5,000 of these costs in the first year of business. Any amount over $5,000 is amortized (spread out) over 15 years.
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Startup costs over $50,000: These costs must be amortized equally over 15 years, with no immediate expense deduction available.
What Qualifies as a Startup Cost?
Generally, expenses that would normally be deductible during regular business operations qualify as startup costs. The IRS specifies that these are either:
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Costs a business would normally deduct if it were already operating actively in the same field.
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Costs incurred before the actual launch of the business.
Examples of deductible startup costs include:
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Advertising for the business launch.
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Salaries and wages for training new employees and their instructors.
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Travel and associated expenses for establishing relationships with prospective distributors, suppliers, or customers.
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Initial software setup costs.
For Max’s marketing consultancy, only expenses directly related to the business operations are deductible. This means that any expense that doesn’t directly support or is essential to the marketing services may not qualify.
If you're unsure about whether specific expenses qualify as deductible for your new S Corp, don't hesitate to reach out to hello@collective.com.
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