Are LLC Startup Expenses Tax Deductible?

By Jeffry Olson, J.D.

Are LLC Startup Expenses Tax Deductible?

By Jeffry Olson, J.D.

Some startup expenses are tax deductible for limited liability companies (LLCs), but not all. Prior to the formation of an LLC, its founders incur significant startup expenses. After the business forms, costs, like advertising and wages, are deductible as business expenses. Although startup expenses are business expenses, they come out of the founders' pockets.

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The U.S. Internal Revenue Service (IRS) considers an LLC to be in the startup phase during development and planning. After the business is operational, either conducting transactions or open for business, costs become business expenses.

Startup expenses for an LLC that are tax deductible include certain expenses incurred prior to the time the LLC begins operating. Qualifying startup expenses incurred during an LLC's first year of operation are also deductible, regardless of the designation of the business for tax purposes. Taxpayers may choose to amortize the tax deduction for a period of not less than 180 months, pursuant to IRS rules.

Tax-Deductible Startup Expenses

Startup costs for creating or investigating the purchase of a business are deductible, as are costs of preparing a business for operation. This includes employee training and wages, advertising, consultant fees, other professional services, and travel costs incurred while finding customers, suppliers, or distributors.

Organizational expenses for the LLC are also tax deductible startup expenses. These include legal fees, fees paid to the state for organization, costs for organizational meetings, salaries for temporary directors, and accounting fees incurred during startup.

When Startup Expenses Are Not Immediately Tax Deductible

Inventory is frequently one of the largest expenses an LLC incurs when organizing. Inventory is not deductible as a startup cost. Rather, the deduction occurs as inventory sells or becomes unsalable.

Long-term assets, or items purchased for the business that last for more than one year, are not deductible as startup expenses. Examples of long-term assets include cars, office equipment, and machinery. The IRS treats these possessions like long-term assets purchased after the business has begun. Generally, long-term assets either depreciate over several years or qualify as a deduction for one year. Depreciation is not an allowed tax deduction until after the business begins operation.

Startup expenses for an LLC are tax deductible, regardless the business' designation for tax purposes. The out-of-pocket expenses for founders, including the costs involved with investigating a business for purchase or creation, expenses incurred preparing a business for operation, and organizational expenses for the business, are tax deductible by the LLC as startup costs. The IRS allows LLC founders to deduct a certain amount of startup costs immediately. The owners can amortize and deduct the remainder of the expenses (again to a certain limit) in subsequent years.

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