Presidential candidate Kamala Harris is proposing a 10x expansion of the Startup Tax Deduction, from $5k to $50k, to promote the creation of small businesses. While this sounds great as a headline, our fractional CFOs greeted it with a yawn. At CFOshare, we rarely see the Startup Tax Deduction making any material difference for new businesses.
To being, the Startup Tax Deduction only applies to brand new businesses, not established startups. Most of you can stop reading there.
If you ARE considering starting a new business, know that the deduction only applies to expenses you incur BEFORE registering the business. (Nearly every expense after registering the business is already deductible.) Even then, only certain expenses count – mainly market research. The $5k you paid your attorneys to register your Delaware c-corp? Nope, that doesn’t qualify.
Lastly, the deduction reduces your taxable income which hardly any startups have. In fact, most startups face losses for years after forming. Yes, you can carry forward the deduction to future years but, at a current max value of $5k in net operating losses (NOLs), hasn’t been worth the cost of paying your CPA to file the paperwork. Harris’ proposed expansion to $50k would help improve the ROI of your CPA’s time.
In conclusion, don’t jump into founding your new startup expecting a $50k refund check from the IRS.
