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So there are 2 types of deductions that can be overlooked especially to the aspiring entrepreneur and the gig worker developing an exit strategy.
Start-Up Costs Deductions
Expansion Deductions
So in this Article, We are talking about:
EVERYTHING You MUST Know about Start-Up Cost and Expansion Deductions
Some of the things you have to consider on a tax perspective
Everything in between
Disclaimer: The content of this Article does not contain and is never intended to be legal, business, financial, tax, or health advice of any kind, This video is for entertainment purposes only. It is advised that you conduct your own research and consult with qualified professionals before applying anything you find online.
Thank you to GigTax for Verifying this information and making this video possible!
Who can benefit from the startup costs deduction?
New businesses that have incurred startup costs can benefit from the startup cost deduction. This includes entrepreneurs who have recently started a business, as well as those who are in the process of starting one.
The deduction is available to businesses of all types and sizes, including sole proprietorships, partnerships, and corporations.
As a gig worker, you are in business for yourself, you have costs that you have to have in order to get going in business.
This also applies to those gig workers who have developed some kind of exit strategy, because the gig economy is an income bridge to what would be a long term goal and not the goal and these deductions may make it more affordable to pursue your dreams!
What Business Startup Costs are Deductible?
When starting a business of any kind, it's essential to understand what costs are deductible. Deductible startup costs and deductible organizational costs are two categories that can help new business owners save on taxes.
Knowing which costs fall into these categories can make a significant difference in the financial success of a business.
Deductible Startup Costs
When starting a new business, there are many costs that need to be considered. Fortunately, some of these costs may be tax-deductible, helping new business owners save money on their taxes.
These deductible business startup expenses include costs that are necessary when starting or buying an active trade or business, such as:
Research and development expenses may include costs incurred related to the creation and testing of prototypes, the development of new technologies, labor supply, or the refinement of existing products or services.
Market research expenses may include costs paid related to surveys, focus groups, or other research methods to understand potential customers' needs and preferences.
Employee training costs may include expenses related to onboarding new employees, such as training materials, instructor fees, and travel expenses.
Advertising and promotion costs may include expenses related to creating and distributing marketing materials, such as brochures, flyers, or advertisements.
Equipment and supplies costs may include expenses related to purchasing or leasing equipment and supplies necessary to operate the business.
Professional fees, such as legal and accounting fees, may be incurred to help with business registration, tax preparation, and other legal or financial matters.
Rent and utilities during the startup phase such as rent for office or retail space, as well as utilities such as electricity, water, and internet service.
For most gig workers, the first 3 points aren't going to account for much until you develop an exit strategy.
Advertising for gig workers only applies if you start to develop some direct partnerships where you may need business cards/set up a digital business card or otherwise.
Equipment for us can range in a bunch of different areas between phones, cars, maintenance, bags, dolly’s, wagons, carts, laptops, the list can go on for days.
Professional fees at the moment I would say mostly accounting and business registration, legal fees aren’t going to affect us as much in most cases because the opposing counsel will probably target the company LONG before us.
Rent and utilities will apply if you have set up your home office space, which yes we are eligible for if you set it up right.
Deductible Organizational Costs
Deductible organizational costs are those incurred during the formation of a corporation or partnership. These costs include:
Legal and accounting fees for incorporation or partnership formation may include expenses related to the preparation of legal documents such as articles of incorporation or partnership agreements, as well as any consulting fees charged by accountants or lawyers.
State fees for incorporating or registering the business may include expenses such as filing fees or franchise taxes required to register the business with the state.
Organizational meeting costs may include expenses related to the initial meetings of the corporation or partnership, such as travel and lodging expenses for shareholders or partners.
Fees for obtaining licenses and permits may include expenses related to obtaining the necessary permits and licenses required to operate the business.
Costs associated with transferring assets to the new business may also be tax-deductible. These costs may include expenses related to transferring assets such as real estate, inventory, or intellectual property to the new business.
Again most of this won’t apply unless you are ready to develop an exit strategy.
What Startup Business Expenses are not Deductible?
While there are many startup costs that are deductible, not all expenses qualify. Some costs, such as personal expenses or those incurred before the business is operational, cannot be deducted. Here are examples of startup costs that are not deductible:
Personal expenses
Not to be confused by using personal items for business purposes.
Capital expenses
A capital expense is a one-time investment that a company makes to purchase, maintain, or improve its fixed assets. These assets can be physical, nonconsumable, or intangible, and they are essential for a business to function.
This is not to be confused with how people would pay for a remodel for a home so they can do a Cash-out refinance on the home they invested in, or something like that, this is a conversation about taxes, not refinancing.
Which is good to know if real estate has something to do with your exit strategy.
Research and experimentation costs before the business begins operations
Nothing to do with us, but may have to do with the exit strategy you chose.
Expenses for acquiring intangible assets like patents and copyrights
I am surprised this doesn’t fall under legal expenses to be honest. Maybe that is why hiring a lawyer to provide the service of acquiring the patents and copyrights can be a “deductible expense” but while you are there double check before doing that.
Costs related to acquiring an existing business
If you are going to buy a business, that’s awesome but is not a write off.
Expenses related to issuing stock or other securities
Which makes sense.
Fines and penalties
Parking and tolls can be a write off, not a parking speeding ticket.
Expenses for lobbying or political activities
Good. Hate them both and they shouldn’t provide any more advantages than it does.
Costs related to tax-exempt income or other tax-exempt entities
Makes sense. If it is tax exempt, then you shouldn’t use it as a deduction as well.
Expenses for creating or administering a pension plan or trust
Okay.
Costs related to issuing tax-exempt securities or financing through tax-exempt bonds
Again, if it is tax exempt then why would it be a deduction as well.
What Business Types are Eligable for Start-Up Cost Deductions?
Almost all business types are eligible but each one has different rules attached to it.
LLC
An LLC can deduct startup costs on its tax return. However, the deduction is subject to certain limitations and eligibility requirements. The IRS considers startup costs as capital expenses that are necessary to get the business up and running.
Sole Proprietorship
Yes, a sole proprietor can deduct startup costs on their tax return, subject to certain limits and requirements. The startup costs must be ordinary and necessary expenses incurred in the course of starting the business and cannot exceed $5,000 in the first year, with any remaining costs spread out over 15 years.
Independent Contractor
Yes, independent contractors may be able to deduct startup costs associated with their business, such as equipment purchases and marketing expenses, on their tax returns. Just like for LLCs and sole proprietors, the deduction is limited to $5,000 in the first year of business and any remaining costs can be spread out.
That said, regardless of which of these entities represents you best, It's important to consult with a tax professional to ensure you are accurately reporting all eligible expenses and taking advantage of all available deductions.
When Can You Take the Startup Costs Deduction?
You can take the startup costs deduction in the year that your business begins. The deduction is available for expenses incurred during the process of creating or investigating a new business, such as market research and advertising costs.
The maximum amount of startup costs that can be deducted in the first year is $5,000, with any remaining balance being amortized over a period of 15 years.
That said, it's important to keep accurate records and consult with a tax professional to ensure you are taking advantage of all available tax deductions, which is where GigTax is here to help!
As someone who has ventured into self-employment via food delivery apps, the income is promising. That said, you are also faced with challenges in navigating taxes as a self-employed person and transforming your “gig” into a sustainable business.
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