Starting a new business is exciting, but it also comes with essential tax considerations that can impact your bottom line. Many entrepreneurs miss out on tax deductions for small businesses simply because they don’t understand when their business officially “starts” for tax purposes. Proper tax planning ensures that you maximize your deductions while staying compliant with business tax regulations.
Understanding business tax deductions is crucial from day one. According to the IRS, businesses can deduct ordinary and necessary expenses, but knowing when and how to do so is key to reducing your business taxes.
When Does a Business Officially Start?
For tax purposes, a business officially starts when:
1. It begins the activities for which it was created.
2. It is capable of generating revenue – even if income hasn’t been earned yet.
Indicators of an active business include:
- Efforts to market or sell your product or service
- Making your first sale
- Launching a public-facing website
Without clear business activity, expenses may not qualify as deductions under small business tax deductions rules.
The Importance of Documenting Business Activity
Lack of income doesn’t automatically disqualify you from claiming business expenses as tax deductions. However, you need to provide evidence that your business is operational.
To strengthen your claim:
- Keep records of contracts, client interactions, invoices, and marketing efforts
- Document business expenses related to setting up and running your operations
- Maintain a timeline of your business tax planning activities
This documentation helps prove that your business is active and eligible for tax deductions for starting a new business.
How Do Business Tax Deductions Work?
A business tax deduction lowers your taxable income by subtracting eligible business expenses from your total revenue. This reduces the amount of business taxes you owe, helping you save money and reinvest in growth.
Are Business Expenses Tax Deductible?
Yes, but only if they are ordinary and necessary. This means they must be common in your industry and helpful for running your business. Some expenses – such as rent, office supplies, and software subscriptions – are immediately deductible, while others, like equipment, must be depreciated over time.
Start-Up Costs and Tax Deductions
Before your business officially starts, many expenses qualify as start-up costs tax deductions under Section 195 of the tax code.
Start-up costs typically include:
- Market research and feasibility studies
- Legal and accounting fees
- Advertising and initial marketing expenses
- Training employees before operations begin
The IRS allows businesses to deduct up to $5,000 in start-up costs in the first year. The rest can be spread out over 180 months. Even if your business hasn’t made money yet, these expenses can still reduce your taxes.
If your business fails after officially starting, you can deduct any remaining start-up costs and operating expenses. In one case, this resulted in over $41,000 in deductions.
Case Study: Kellett v. Commissioner
In Kellett v. Commissioner (T.C. Memo. 2022-62), the court ruled that a business officially starts when it begins operations – not when expenses first occur. In this case, a financial website launched on September 30, 2015, and only expenses after that date qualified as ordinary business deductions under Section 162.
Key Takeaways for Business Owners
- Expenses before launch are start-up costs under Section 195.
- Expenses after launch are fully deductible as operating costs.
- Proper documentation ensures you maximize deductions and avoid misclassification.
This case underscores the importance of strategic tax planning to minimize business tax liability.
What Costs Can You Claim for a Business Tax Deduction?
Eligible deductions include:
- Office rent and utilities
- Employee wages and contractor payments
- Business insurance
- Marketing and advertising costs
- Professional fees (legal, accounting, consulting)
- Software and subscriptions
- Vehicle and travel expenses (if business-related)
Understanding small business tax deductions and properly tracking expenses ensures that you claim every deduction available under business tax planning rules.
Key Takeaways
- Your business must have started its intended operations before claiming deductions.
- Keep detailed records of transactions, marketing efforts, and client interactions.
- Understand start-up costs and tax deductions and how to maximize them.
Need help navigating business tax deductions? Consult My Tax Service to ensure you’re taking full advantage of available tax benefits.
