Starting a Business — Tax Deductions, Startup Costs, and What You Can (and Can’t) Write Off
(Episode 19 – Savvy or Surrender Podcast)
Thinking about launching in 2026? Before you order the logo and set up your Instagram, get clear on one thing that can save you real money: what you can and can’t write off, especially the difference between startup costs and operating expenses.
Mix them up, and you could miss deductions, overpay taxes, or send messy records to your accountant. Get them right, and you’ll set up your business for cleaner books, smarter tax planning, and stronger cash flow from day one.
What You Can and Can’t Write Off When Starting a Business
When you’re starting a business, not every expense is treated the same. Some expenses can be deducted, some need to be spread out over time, and some are not deductible at all.
- You can typically write off ordinary and necessary business expenses for your industry. During startup, many of these are categorized differently than expenses after you officially open.
- You can’t immediately deduct everything you spend before you’re open for business. Many pre-opening expenses are considered startup costs and may need to be amortized over time.
- You can write off capital assets over time through depreciation. Some assets may qualify for Section 179 or bonus depreciation after operations begin.
- You can’t deduct personal expenses. Keep business and personal spending completely separate to preserve deductions and protect your entity.
Startup Costs vs. Operating Expenses: Why the Difference Matters
What Are Startup Costs?
Startup costs are expenses you pay before your business is officially open and ready to serve customers. These may include research, training, pre-licensing, initial marketing, business formation, website build, initial legal/accounting help, and pre-opening travel.
What Are Operating Expenses?
Operating expenses are the ongoing costs you pay once you’re actively offering your product or service. These may include advertising, software, supplies, mileage, rent, utilities, payroll, merchant fees, dues, and subscriptions.
Why This Difference Matters
- Taxes: The IRS treats startup costs and operating expenses differently, so misclassification can delay deductions.
- Cash flow: Separating pre-launch and post-launch expenses helps prevent the “busy but broke” feeling.
- Funding: Lenders and investors want clean, organized, and properly categorized books.
When Does “Startup” End and “Operations” Begin?
The IRS generally looks at when your business is ready and available to serve customers, not just the day you register your LLC.
Practical markers may include:
- Licenses or permits are in hand and you’re legally able to perform the work
- Tools and systems are ready, such as software, equipment, and a business bank account
- You are actively seeking customers through live listings, an open calendar, or launched marketing
Example: Realtor
Pre-licensing courses and exam fees are typically considered startup costs. Once licensed and actively listing or showing homes, expenses like MLS dues, E&O insurance, lockboxes, signs, and mileage may be considered operating expenses.
Example: Franchise Owner
Franchise fees, training, site selection, and build-out are often treated as startup or capital costs. After opening day, payroll, supplies, royalties, rent, and utilities are generally operating expenses.
How Startup Costs Are Deducted
Startup costs are not always deducted the same way as regular business expenses.
- Up to $5,000 of qualifying startup costs may be deducted in your first year if total startup costs are $50,000 or less.
- Startup costs above the allowed first-year deduction are generally amortized over 15 years.
- Organizational costs, such as forming an LLC or corporation, have similar $5,000 first-year deduction and 15-year amortization rules.
- Capital assets, such as equipment, furniture, and some software, are usually depreciated. Some may qualify for Section 179 or bonus depreciation once you’re in operation.
Common Startup Costs You May Be Able to Write Off
Subject to startup cost rules, common deductible startup expenses may include:
- Market research and pre-launch training or education
- Initial branding, website build, and domain purchase
- Legal and accounting for initial setup
- Travel to training or suppliers before opening
- Initial marketing collateral, such as business cards and signage
- Franchise fees and required training, which are often amortized
Costs That Are Not Usually Deductible in Full Right Away
- Large equipment and build-out costs, which may need to be capitalized or depreciated
- Personal development unrelated to the business
- Personal living expenses during startup
Common Operating Expenses You Can Deduct After Launch
Once your business is officially operating, common deductible expenses may include:
- Advertising and ongoing marketing
- Software subscriptions and CRM tools
- Office rent or the business-use portion of a home office
- Phone, internet, and utilities
- Mileage, travel, and client meals, subject to IRS rules
- Payroll, contractors, and merchant fees
- Insurance, licenses, dues, MLS fees for realtors, and royalties for franchises
Real-World Examples: What’s Deductible for Realtors, Franchise Owners, and Coaches
New Realtor
Pre-licensing and exam fees are typically startup costs. MLS dues after you’re active are generally operating expenses. A camera, laptop, or lockboxes purchased once you’re taking clients may qualify for Section 179. Mileage should be tracked from day one.
Franchise Buyer
A franchise fee is generally amortized over 15 years. Build-out and equipment may be capitalized and depreciated, and some may qualify for Section 179 or bonus depreciation once the business is open. Royalties, payroll, and supplies are usually operating expenses.
Solo Service Provider, Coach, or Consultant
Pre-launch course development, market research, and website build are typically startup costs. Zoom, scheduling software, ads, and subscriptions after launch are usually operating expenses. A home office deduction may be available if the space is used regularly and exclusively for business.
How to Track Expenses So You Don’t Miss Legit Deductions
- Open business bank accounts early. Separate personal and business spending from day one.
- Use clear categories. Track Startup Costs, Organizational Costs, Capital Expenditures, and standard operating expenses separately.
- Timestamp expenses. Record the date your business became open for business because that date affects classification.
- Keep receipts and notes. Add simple memos like “pre-licensing training” or “initial brand design.”
- Build a launch budget. Forecast 3 to 6 months of operating expenses to reduce cash pressure.
Big Mistakes That Cost New Business Owners Money
- Treating every expense as a first-year write-off when some items must be amortized or depreciated
- Waiting until tax time to do bookkeeping, which can lead to lost deductions and more stress
- Mixing personal and business spending, which can muddy deductions and risk liability protection
- Ignoring entity choice, such as LLC vs. S-Corp timing, which can affect payroll taxes once profitable
Bottom Line
Understanding what you can and can’t write off, and knowing the line between startup costs and operating expenses, is not just a tax technicality. It is a money-saving, stress-reducing habit that sets your business up for success.
Get the categories right now, and future-you will thank you at tax time.
Starting a Business? Get Your Categories Right From Day One
Starting a business? Learn what tax deductions you can and can’t write off, how startup costs work, and smart ways to track expenses for better tax savings.
Book a free consult with Savvy Tax Strategies to get your categories dialed in.
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