Who has the time to worry about tax deductions when starting a tech company is kind of a plate full? The cost of starting a tech startup in the early stages is quite hefty. Most entrepreneurs, however, fail to find time to consider tax deductions as a solution. The value in tax write-offs for a tech startup will have you think more than twice about tax deductions.
Tax deductions are about to become your highest priority. Tax deductions directly impact how much money you pay in taxes each year. The more you understand them, the more you can write off—and the less you’ll have to pay.
1.) Startup Costs
Your tech startup can use startup costs to reduce business taxes, but there are limits and restrictions on these costs. The IRS says that startup costs are the amount paid or incurred for Creating an active trade or business. Amount paid or incurred for investigating the creation or acquisition of an active trade or business.
If you invest money to launch your business, the expenses you incur may count as your first business deduction. In this instance; a startup that costs less than $50,000 enables a deduction of up to $5,000. Startups between $50,000 and $55,000 have a lower deduction limit. Startups costs above $55,000 do not take the deduction. It is critical to keep good records of your launch expenses to enable you to access this deduction.
2.) Organization Costs
Organization costs are inclusive of costs incurred in forming a partnership, a limited liability company. Legal fees and other expenses you will incur when developing the business’ structure fall party to organization costs. As a small startup, you are allowed to take up to $5,000 in the additional deduction. This is separate from the startup costs deduction of $5000.
3.) Research and Development Credit
Research and development credit is not only for the pharmaceutical companies. Tech companies are also subject to it. The IRS offers you a sizeable credit if you are developing any new strategies and solutions for your customers. Various products and services qualify for the research and development credit inclusive of software and physical products.
The new tax law enables companies with annual revenue below five million dollars to apply for a $250,000 R&D credit. The aim of this is to allow them to offset their FICA payroll taxes. You may want to apply for the loan for five years to enable you to reach the potential of $1.25 million in tax credits.
4.) Software Subscription Costs
A tech startup will use various kinds of software in its operations. On average, a small startup will use between 16 to 20 apps. You will likely have a social media platform, a proseries tax software for bookkeeping, content marketing platform, or a contact management system in place. This is to mention just but a few. You are treated to an offer of deducting the subscription costs of these operations as a business expense.
Therefore, it is a good idea to work with an experienced and skilled accounting company to maximize all possible deductions and credits for your tech startup. Even better, you can deduct this expense too.
5.) Equipment Purchases
The amount used to purchase equipment for your startup can be deducted. It is, however, dependent on the cost of the equipment to its depreciation. A computer purchased at $5, 000 with a 5-year lifespan will depreciate by $1,000 per year. In such a case, you can claim $1,000 depreciation expense every year on your taxes.
Section 179 of the IRS (Internal Revenue Service) tax code allows several businesses to deduct the full purchase price of qualifying equipment, or financed during the tax years, and/or software purchased. You can perform depreciation calculation using simple depreciation calculator. Yes, macrs depreciation calculator is the tool that helps you to calculate how fast the value of an asset decreases over time.
6.) Cost of Goods sold
The price you incur as a seller in the manufacture or selling of an item is the COGs (cost of goods sold). This can be tricky for tech startups as the goods are most often than not virtual. Usually, a business would purchase tangible materials to be used in the manufacturing of products. The tech space costs for tech startups exist in a virtual space.
I this case, your COGs are directly assigned to the application or product you are selling as opposed to your operational costs. In many cases, costs will seem similar but categorized differently. For example, a software subscription relating to your product is considered a COGs.
Some of the few things you may include to your COGs deductions as a tech startup consists of the cost of subscription relating to the product. Software or Application hosting costs and third-party software fees relating to a product. Where the product is delivered visually, expenditure incurred in USB drives, manual printing, and packaging material is deductible.
7.) Home Internet
With a tech startup, you can write off a portion of your home internet bill. Working in tech translates to a significant amount of time spent online. The write off percentage is dependent on how much of the home internet is used for personal vs. business purposes.
You can reimburse your employees for home internet and home office expenses. The reimbursement is deductible. Note that the deduction is directed to the business owner and, not to the business itself.
8.) Advertising and Promotion
All costs that fall under business promotion are deductible. Areas covered here include marketing, promotional materials, and website items. If you have ad placement on websites, printing business cards, creating a domain name, all expenses incurred are deductible.
9.) Standard Mileage for Business Use of Car
You do not hide behind a computer all day because you work in tech. There are instances you will need to be out of the office to run business errands. A business errand could be a rush to the office supply store, post office, or print shop. Traveling to networking events and meetups. Travel ling to business meetings with partners, investors, contractors, and employees
In any case, you use a car for your business; you are entitled to certain tax deductions. Certain factors will determine the amount and type of deductions you are subject to. The IRS offers you two options. You can either deduct the actual expenses you incur for using your car for your small startup. Or you can deduct the standard mileage rate for every mile you drive your vehicle for business. The latter is dependent on meeting specific criteria.
10.) Bank Fees, Business Licenses, Permits, and Commissions
You are offered a deduction of any fees associated with bank accounts and business loans. You can deduct expenses related to monthly service, overdrafts, deposits, wire transfer, and ATMs. Credit card such as annual ad late payment fees are deductible. Also, loans for setting up and closing costs are subject to deduction.
There are numerous licenses that your tech startup will need before beginning operations. You need a general business license and even a permit from the fire department. There is a whole stack to keep up with, but you can deduct the costs associated with any license or permit.
The cost you incur when paying affiliates or partners to promote a product or service are considered the deductible. A professional tip is that affiliates are considered 1099 contractors. The catch is that if you pay your affiliates more than $600 in a tax year, you must file a 1099 return.