Starting a startup is kind of a lot. You’re camping out in Zoom meetings, securing an office space, and scouring the internet for mid-century modern furniture.
Who’s got time to worry about startup tax deductions?
Because, trust me, tax deductions are about to become your new favorite keyword.
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.
Tech startups spend a lot of dough, especially in the early stages. Despite that, many entrepreneurs don’t take the time to identify their deductions BEFORE they start spending money. The result? Valuable tax write-offs disappear.
If this sounds like you, this guide to startup tax deductions is for you.
1. Advertising and promotion
Everything you spend on promoting your business is deductible, such as:
Facebook Ads, Google Adwords, Linkedin ads, ad placements in digital and print publications, ad placements on websites, email marketing software, social media scheduling software, fees for sponsored content by influencers, content marketing costs, and more
Business cards, flyers or leaflets, posters, and swag with your logo on it, like pens, tote bags, t-shirts, water bottles, and more.
Domain names, hosting, security certificates, subscription website services, themes, plugins, stock photos, and other things you buy for your website.
2. Auto expenses
Working in tech doesn’t mean you hide behind the computer all day. You gotta leave the office sometimes and, when you do, you can write off your business travel expenses.
Business travel includes things like:
- Errands to the office supply store, post office, and print shop.
- Travel to networking events and meetups.
- Travel to business meetings with partners, investors, contractors, and employees.
There are two methods to write off your auto expenses:
The easiest way to write off your auto expenses is by tracking your business mileage and taking the mileage deduction at tax time. Every year the IRS sets a standard mileage rate. At the end of the year, you just multiply your annual business mileage by the rate to get your mileage deduction.
- Here’s an example: You drive 1,000 miles to take care of business errands. The IRS mileage rate for 2020 is 57.5 cents per mile. The formula is: 1,000 x 57.5 cents = $575. Your deduction is $575!
The second way to write off your car is by writing off a percentage of your total vehicle expenses. Vehicle expenses include insurance, gas, repairs, oil changes, and car washes. The percentage you write off depends on how much you use your car for business travel vs. personal travel.
- Here’s an example: You drive a total of 10,000 miles and 3,000 miles are for business. You can deduct 30% of your expenses. Let’s say you spend $6,000 on your car. The formula is: $6,000 x 0.30 = $1,800. So your deduction is $1,800!
Regardless of which method you choose for your auto deduction, parking and tolls for business travel are 100% deductible. So keep feeding that hungry meter.
3. Bank fees
Fees associated with your business bank accounts and business loans are deductible.
- Bank fees: You can deduct fees associated with monthly service, ATMs, overdrafts, deposits, and wire transfer.
- Credit card fees: This includes annual and late payment fees.
- Loan Fees: This includes set-up costs for loans like originator and underwriting fees, along with closing costs.
4. Business licenses and permits
There is a whole stack of business licenses you may need in order to operate your startup. From a general business license to permits from the fire department, there’s a lot to keep up with. Luckily, the fees and costs associated with your licenses and permits are deductible.
5. Charitable contributions
This means cash and in-kind donations you made to charity. For a donation to be tax deductible, the organization must be categorized as a 501(c)(3) non-profit. That means donations to your favorite political organizations are NOT tax deductible. Remember, always request a donation receipt for your taxes, since you’ll have to include that when you claim the deduction.
Commissions are what you pay to affiliates or partners to promote your product or service.
- Pro Tip: Affiliates are considered 1099 contractors and, if you pay them more than $600 in a tax year, you must file a 1099 return.
7. Cost of goods sold
Cost of goods sold (COGS) is a special type of expense that pertains to the cost you, the seller, incurs to manufacture or sell an item. For tech startups, COGS can be tricky because what you sell is often virtual. Instead of purchasing tangible, raw materials to manufacture a product, your costs exist in the virtual space.
Therefore, COGS should be directly related to the application or product you’re selling, not your operational costs. You may find that you’ll have costs that seem similar but will be categorized differently. For example, a software subscription to Spotify for office music is an expense. A software subscription related to your product is COGS.
While there is no hard and fast rule around what counts as COGS for tech startups, here are a few examples of what you might include:
- Application or software hosting costs, like Amazon Web Services.
- Cost of subscriptions related to the product.
- Licensing fees or third-party software fees related to the product.
- Cost of employees directly related to keeping the product operational.
- Cost of employees directly related to customer service, accounts management, and technical support.
- CDs or USB drives, packaging materials, and printing for manuals if the product is delivered physically.
Since tech startups are often relatively new in the world of business, there’s still a lot to learn for both owners and employees alike. The good news? You can deduct the cost of work-related educational materials and opportunities for you and your employees such as:
- Books & reference materials: Printed books, ebooks, magazine subscriptions, newspaper subscriptions, and audio books.
- Workshops and trainings: Online courses, online summits, mastermind groups, in-person workshops, conferences, and lecture series.
9. Equipment purchases
Equipment you purchase for your startup is deductible. Depending on the cost of the equipment, it will either be taken as an expense and written off in one tax year, or taken as an asset and depreciated over several years.
Depreciation? What does this accounting speak mean?!
Depreciation is a method of allocating the cost of an asset over the lifespan of the asset. For example, if you purchase a $5,000 computer and plan to use it for five years, the computer would depreciate $1,000 per year. You can claim that $1,000 depreciation expense each year on your taxes.
In the early stages of your startup, you’ll likely make big equipment purchases like computer and networking systems to get things up and running.
Speak with an accountant about how best to deduct these costs. There are guidelines for depreciating expenses, as well as exceptions, and an accountant can help you determine the best tax strategy.
Hosting a big launch party for your new startup? Throwing a thank you party for your employees? Expenses related to events that you host, both for the general public and your employees, can be written off, including:
- Food, drinks, and catering fees (100% deductible for public events and employee events).
- Paper goods, flatware, linens, table, and chair rentals.
- Entertainment costs like a DJ, band, emcee, ambient performers, and speakers.
- Staffing fees like an event planner and coordinator, parking attendants, cleaners, and setup/breakdown staff.
- Venue rental.
11. Furniture and decor
Creating a functional yet comfortable office doesn’t come cheap. Fortunately, you can write off the costs of your furniture. Just like equipment purchases, furniture and decor will either be taken as an expense and written off in one tax year, or taken as an asset and depreciated over time.
- Furniture like tables, chairs, stools, desks, sofas, and waste receptacles.
- Whiteboards and presentation materials.
- Decor such as art (including framing), lighting, rugs, plants, and stylish props (come on, tell me you haven’t seen a spiky glowing orb that has no purpose but to look nice).
Gifts to customers, employees, or affiliates can be deducted, up to $25 per recipient per year. Yes, that means if you give your top-selling affiliate $100 tickets to Mamma Mia (the best musical ever), you can only deduct $25. Sorry.
Note: As a business, you can reimburse owners for things like home internet and home office expenses, which we’ll get into below. Those reimbursements are tax deductible. However, keep in mind that these are deductions for business owners—not the business itself.
13. Home internet
Working in tech means you spend A LOT of time online, #InternetFatigue. But now you may be able to write off a portion of your home internet bill. The percentage is based on how much of your home internet is for personal vs. business use.
- Here’s an example: You use 60% of your home internet for work. Your monthly internet bill is $100/month. The formula is: $100 x 0.60 = $60. Over one year, your deduction is twelve times the business portion of your monthly bill, or $720.
As a business, you can reimburse owners for things like home internet and home office expenses, and those reimbursements are tax deductible. However, keep in mind that these are deductions for the business owners—not for the business itself.
14. Home office expenses
Still in the incubator phases of your startup and working from home? While you may not be paying rent on a commercial space, you can still benefit from the home office deduction.
Let’s start with this: What is a home office?
Per the IRS, a home office must meet two requirements.
First, it must be a space in your home used exclusively for business purposes. That means your kid’s playroom cannot double as a home office space. Second, it must be used regularly for business purposes. You can’t take a call once in your garage and call it a home office.
Have a space that meets both of these requirements? Then let’s calculate your deduction. You need to figure out both the total square footage of your home and the square footage of your exclusive home office space. Then, divide your home office square footage by the full square footage of your home. This is the deductible percentage of your home expenses.
- For example: Your home is 1,000 square feet (don’t laugh- I live in the Bay Area!). Your home office is 250 square feet. The formula is: 250 sq ft/ 1000 sq ft = 0.25 = 25%
Okay…I know this is a lot of work but stay with me. NOW you can deduct a percentage of your home expenses for business use.
- For example: Your rent is $3,000 a month (Bay Area!!!!). Your home office is 25% of your home. The formula is: $3,000 / 0.25 = $750. Over one year, 12 x $750 adds up to $9,000!
You can write off a percentage of the following expenses:
- Rent or mortgage.
- Renters’ or homeowners’ insurance.
- Utilities (like gas, electric, and water).
- Repairs to your home office space. In fact, any repair made directly to your home office is 100% deductible.
15. Business insurance
Want to stay protected? Invest in business insurance. Even better? You can write off the cost of insurance for:
- General liability coverage.
- Cyber liability insurance.
- Commercial property insurance.
- Loss-of-income insurance.
16. Interest expense
Needed to borrow a little something-something to get your business started? You can write off your finance charges and business loan interest.
17. Leasehold improvements
Not all office spaces look great fresh out of the box. If you made major renovations to your commercial space, keep track of those costs because you can write them off.
Leasehold improvements can be expensed in one tax year or taken as an asset and depreciated over time. How you deduct leasehold improvements on your taxes depends on the total cost of the improvements and your tax strategy.
Another thing to keep in mind: Leasehold improvements are attached to your business property. For example, a portable bookshelf is not a leasehold improvement. But built-in shelving is. If you can’t take it with you when you leave, it’s probably a leasehold improvement.
A few more examples:
- Built-in shelving and cabinets.
- Electrical work.
- Plumbing work.
- Carpeting and flooring.
- Permits needed for work.
- Architecture and design fees.
18. Meals—but not entertainment
Oh man… the upside-down world of meals and entertainment. Since the new 2018 tax law, the meal write-off has been hotly debated among tax professionals. The new tax law has some grey areas when it comes to writing off the cost of food, but here’s what we know:
- Meals while traveling (as an owner or for an employee): 50% deductible
- Meals with employees for meetings: 50% deductible
- Meals for employees during work shifts for the convenience of the employer: 50% deductible
- Meals with business clients and associates: Perhaps 50% deductible. The new tax law is unclear about the deductibility of these meals. Always check with your tax preparer to get their take before claiming a new deduction.
Wait! Can’t I take my best customers out to the ball game? Only if you’re willing to eat the costs. As of 2018, you can no longer write off the cost of entertaining clients.
19. Merchant processing fees
Selling digital products means you likely accept credit cards. Many fees associated with processing credit cards are deductible, including fees from:
- Stripe, PayPal, Authorize.net, Square, Braintree, Intuit payment processor, and many other payment gateways and processors.
20. Payroll expenses
These are expenses related to running payroll for your employees.
- Local, state, and federal payroll taxes.
- Payroll service fees, or in other words, the fees that you pay your payroll provider.
- Workers’ comp insurance.
21. Professional fees
Legal and professional consultations for your business are deductible, including:
- Accountants and bookkeepers.
- Legal fees for an attorney or online legal service.
- The cost of purchasing templates for contracts, terms and conditions, and privacy policies.
22. Office expenses
Having an office means there are a lot of sneaky expenses. Don’t let these bad boys fall through the cracks. Instead, deduct them! Common office expenses are:
This is equipment you purchase for office use such as computers, tablets, printers, and copiers. (Keep in mind that equipment that costs over $2,500 may be considered an asset and depreciated over time rather than deductible at the time of purchase.)
Software and online services
One time and ongoing software subscriptions for things like cloud storage, office communications, task management software, accounting software, music subscription services, and apps. Remember, if these services relate to your product rather than the operation of the business as a whole, they fit under COGS.
Consumable goods, or products that get used up, like office supplies. Specifically, this can include paper, pens, ink, file folders, etc.
Rent that you pay for your office. Working from home? See the home office deduction above. You can also deduct the cost of your portion of co-working spaces, too.
24. Repairs and maintenance
This includes ongoing repairs and general maintenance for your space.
- Cleaning and janitorial services.
- Small repairs (anything major is a leasehold improvement).
25. Research and development costs
Research and development costs are expenses related to developing new products or researching new ways of doing something. It’s the cost of experimenting and innovation. For many tech startups, R&D is key to developing a product or technology that is cutting edge.
As you can imagine, research isn’t cheap. The good news? You can write it off with the R&D tax credit. While writing it off can get tricky, Gusto has made the whole process a lot easier through it’s R&D Tax Credit Service. They can automatically scan your payroll data to help you see if you qualify. Startups have a unique advantage with the R&D tax credit. Young companies with less than $5 million in gross receipts can use the R&D tax credit to offset payroll taxes up to $250,000 per year. And if you use Gusto’s R&D Tax Credit Service, they’ll automatically apply the payroll offsets for you with no additional work required on your end.
More mature companies can use the R&D tax credit against their income tax liability.
Examples of possible R&D costs are:
- Salaries for your research and development team.
- Payments made to a contractor conducting research on your behalf.
- Materials, rented equipment, and facilities needed to research and develop the product.
- Product prototypes.
- Cost of obtaining a patent for your product.
- Cloud services (to host any software that is under development).
26. Salaries and benefits
Wages and benefits that you provide to your employees are deductible, including:
- Wages, salaries, and employee commissions.
- Employee benefits like health insurance, 401(k) matches, HSA and flexible spending accounts, life and disability insurance.
Need to outsource? Hire a contractor! A contractor is anyone you hire to perform a service for your business that is not an employee. If you pay this person more than $600 in a tax year you will need to file a 1099 return. You may hire a contractor that works as a:
- Developer, programmer, or engineer.
- Graphic or web designer.
- Photographer or videographer.
- Data entry specialist.
28. Telephone and communications
This is the cost of your landline or VoIP service for your office.
Gotta travel to meet with investors? Going to a trade show or conference? You can write off your costs as long as your trip has a business purpose and you’re away from the area where you typically work overnight. Specifically, you can write off:
- Airfare: The cost of your plane ride.
- Ground transportation: Like Lyft, Uber, taxis, public transportation, and rental cars.
- Lodging: This is the cost of a hotel, Airbnb, VRBO, or other short-term rentals.
- Local transportation: Not leaving town? You can still write off the cost of traveling within your local area for business purposes. Just like ground transportation, you can write off taxis, public transportation, Lyfts, and Ubers.
Deduct any utility bills for your office space, including:
- Heat and electric.
- Water and garbage.
- Security systems.
Now that you know about your startup tax deductions, you have one less thing to worry about as you get your new venture up and running.