Are you embarking on a new small business venture? It can be expensive to launch a business today, but you may be able to deduct some start-up costs in the first year of operation. The trick is to get the business up and running before the end of the year.

A special break

Normally, a business can deduct its “ordinary and necessary” expenses. But start-up costs are generally amortized over a period of 180 months, beginning with the month in which the business opens. So, if you’re starting a new business, there generally is no instant tax gratification.

Fortunately, a start-up business may be able take advantage of a special tax law break. If your business qualifies, it can deduct up to $5,000 of its start-up costs and $5,000 of its organizational costs in the first year it’s open for business.

To be open typically means that your business has started offering goods or services in exchange for payment. In other words, simply hanging an “open” sign on a store’s front window isn’t enough.

Because this break is intended for small businesses, the $5,000 current deduction is phased out on a dollar-for-dollar basis for costs above $50,000. Therefore, if start-up costs for the year are, for example, $52,500, you can deduct only $2,500. If costs exceed $55,000, your write-off is zero.

The fine points

Start-up costs are the expenses of starting the business. They include expenses related to making deposits on utilities and space, creating a business website, engaging in marketing and promotional activities, creating studies and surveys, and paying certain travel costs.

Organizational costs are the expenses connected with organizing a corporation, partnership or limited liability company (LLC). They include state incorporation fees and fees associated with creating legal documents and other legal and accounting services.

Some expenses aren’t deductible or amortizable as start-up costs. These include, for example, costs connected with obtaining necessary licenses, purchasing a specific business, paying interest and taxes, research and experimental expenses, and individual business owner expenses. However, these costs may be deductible as other types of expenses.

What happens if your business launch fizzles out? Qualified start-up costs are characterized as capital expenditures and may be deducted in the year the business fails. Similarly, those expenses are deductible if the business is sold before the end of the amortization period. If all the technical rules are met, the business owner may qualify for a loss.

The final word

If you want to claim the current deduction for the 2022 tax year, your business must have opened before January 1, 2023. Other special rules relating to start-up costs may come into play. Consult your business and tax advisors for guidance.