Confused about what qualifies as "startup costs" for my small business tax deduction

Thank you so much for explaining! So if I understand correctly, my equipment isn't a startup cost, but I can still potentially deduct it all under Section 179? What about all the hours I spent learning to use the equipment and setting up my website - can I count any of that as a startup cost?

Your equipment definitely qualifies for either Section 179 expensing or bonus depreciation, which in many cases allows for 100% deduction in the first year you place it in service. Just remember that it must be used more than 50% for business purposes. As for the time you spent learning the equipment and setting up your website, your personal time value isn't deductible as a startup cost. However, any actual expenses related to website development (hosting fees, domain registration, paid themes or tools) would be deductible either as startup costs or regular business expenses depending on when they were incurred relative to when you began operating.

This sounds interesting! Does it handle home-based business situations specifically? I'm always worried about mixing personal and business expenses since I also run my business from home.

I'm a bit skeptical of tax AI tools. How accurate is it really? Has it ever made mistakes that caused issues with your taxes?

It definitely handles home-based businesses! It has specific features for separating personal vs. business expenses, which was super helpful for me since I also work from home. It even helped me properly calculate my home office deduction based on square footage. As for accuracy, I was skeptical at first too, but it's been spot-on. It uses the same tax rules that professionals follow, and if there's ever any uncertainty, it flags the item for your review rather than making an assumption. I've had my accountant verify the results, and she was actually impressed with how accurate it was.

Wait, how does this actually work? How can they get you to the front of the line when everyone else is waiting? Sounds too good to be true.

Yeah right. There's no way to skip the IRS phone lines. They're notorious for making everyone wait equally. I'll believe it when I see it.

It works through an automated system that continually calls the IRS and navigates the initial phone tree for you. Once it gets through to where a human would answer, it calls you and connects you directly. You don't cut in front of other people - the system just handles the waiting part for you so you don't have to sit with your phone on speaker for hours. It's completely legitimate - they even have partnerships with tax firms who use their service for clients. The video demo I linked shows exactly how it works. It's just a smarter way of dealing with the wait times rather than you manually sitting there on hold.

I wasn't even thinking about the home office deduction! How strict are they about the space being used "exclusively" for business? My manufacturing equipment is in the basement, but I occasionally use the space for other things too.

The IRS is pretty strict about the exclusive use requirement. The space needs to be used "regularly and exclusively" for your business. If you're using part of your basement for business and part for personal use, you should clearly delineate the business portion and only claim that area. Some people use room dividers, different flooring, or even just tape on the floor to mark the business space. Taking photos of your dedicated business area is also smart for documentation. Remember, you don't need to claim an entire room - you can claim just the square footage you actually use exclusively for business.

I used TurboSelf-Employed last year for my LLC. It was decent for pretty straightforward situations, but I found it didn't give great guidance on startup costs vs. equipment purchases. If your situation is complex or you have significant investments in equipment, you might want to hire a professional at least for your first year in business.

This is really helpful clarification, thank you! So basically July equipment purchases would be startup timeline but still treated as capital expenditures, and my November sales date is what determines when my business "began operations." That makes much more sense now. One follow-up question - you mentioned keeping detailed records of timing. Should I be documenting the exact dates I placed equipment "in service" versus when I purchased it? I bought my main manufacturing equipment in July but didn't really start using it productively until September after I learned how to operate it properly.