Question

Can you deduct business expenses from a tax return if the business is new and had no income in the year? Which IRS Codes are applicable?

Answer 1

• The IRS allows certain tax deductions in three specific categories—creating, launching, and setting up the business.
• Business owners in the startup phase are limited to a $5,000 deduction in the first year and only applies to startup costs that are $50,000 or less.
• The first-year deduction must be reported on your business tax form.
• You can't claim the startup costs if the business doesn't take off and you aren't able to start it.

In Detail the IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. If your startup costs for either area exceed $50,000, the amount of your allowable deduction will be reduced by that dollar amount. And if your startup costs are more than $55,000, the deduction is completely eliminated.

For instance, if your startup costs were $53,000, you would lose $3,000 of the deduction, and would only be allowed to deduct $2,000. And if your startup costs were $55,000 or more, you don’t qualify for the deduction at all. The costs remaining after your deduction should be amortized (paid off over a period of time) annually in equal portions over the next 15 years.

You should claim the startup deduction for the tax year that the business officially opened. If you fail to claim the deduction, you can still file an amended return within six months of the return’s due date (not counting extensions). If you do that, the IRS says you should write “Filed pursuant to section 301.9100-2” on your amended return, and send it to the same address where you sent your original return.