American identity is created in part by the idea of the self-made man or woman, and perhaps nowhere else in the world is the entrepreneurial spirit so enthusiastically celebrated.
But as anybody who’s owned his or her own business will attest, being an entrepreneur isn’t for the faint of heart. While statistics vary wildly for first-year startup failure rates, even the most optimistic odds are not terribly encouraging, with much of failure related to cash flow problems.
To encourage entrepreneurship as well to help startups with the significant costs of getting themselves up and running, the U.S. government offers specialized tax deductions and credits to entrepreneurs. Taking advantage of these tax breaks can offset entrepreneurs’ startup costs, manage their cash flow, and defy the odds of first-year failure.
Capital expense write-offs—a tax break for startup costs incurred in establishing a business—can benefit entrepreneurs for well over a year. Section 195 allows $5,000 of startup expenses accumulated in the first year of the business’ operation to be written off, with the remaining amounts deducted in equal increments over the following 15 years.
Examples of capital expenses include business-related licenses or building permits, accounting and legal fees, rent for office space or equipment, market research, advertising, employee procurement and training costs, and most expenses associated with launching a business.
It is not uncommon for entrepreneurs to run their businesses out of their homes, and the tax code allows for dozens of expenses that might be deducted to reduce an entrepreneur’s tax burden. These expenses include mortgage interest payments, homeowner’s or renter’s insurance, internet service, and many other costs associated with doing business.
Regardless of whether an entrepreneur owns or rents their home, they can deduct the costs of a home office by calculating what percentage of their living space is used for dedicated business activity. There are similar deductions available in relation to motor vehicles used for a business. These vehicle-related deductions can be taken as actual vehicle expenses (such as fuel, insurance, and repairs) or as the IRS’s standard mileage rate.
Entrepreneurs need to be aware of the tax consequences of getting rid of property that is no longer helping their business. The IRS refers to the sale, exchange, retirement, abandonment, destruction, or involuntary conversion of property or equipment as a “disposition,” and when an entrepreneur disposes of equipment or property that involves a gain or a loss, this must be reported via Form 4797. If an entrepreneur reports a loss on the sale of business-use property, it doesn’t qualify as a capital loss but rather as an ordinary loss, allowing them to deduct the entire loss amount from their business income.
Savvy filers take advantage of every available deduction and expense to increase the odds that their startups will have the cash flow to successfully get off the ground and remain financially sustainable. When it comes time to file, E-file provides an easy tax portal to allow entrepreneurs to efficiently submit their tax returns, maximize their refunds, and get back to business.