Is Research for a New Business Tax Deductible?

Is Research for a New Business Tax Deductible?

by Steve Kroening
October 18, 2007 With a lot of uncertainty floating around the economy these days, many people are out of work. These folks are either looking for work or thinking about starting their own business. We've had several people write in looking for help with this area. One subscriber, Karen M., asked:

"I have a question about starting a business in Michigan where the economy for employment has taken a drastic turn. Do you know if the research and development of a business is a tax deductible expense and can you elaborate on that for me?"

We turned to our colleague Dr. Wayne Essex, president of the full-service accounting firm Essex & Associates, for the answer.

Dr. Essex said, "Yes, research expenses are deductible up to a maximum $5,000 in the start-up year. The $5,000 is deductible even if the business idea does not come to fruition. The expense would be taken on a Schedule C, Profit and Loss from Business, and then transferred to the front page of the 1040.

"This research expense could also be delayed until the new business has revenue and then offset against those sales. This $5,000 expense will also lower the state tax of Michigan. Michigan uses the Adjusted Gross Income on the federal return. You'll want to check with an accountant for details in other states."

I'd also like to add that I'm excited you're looking for different options in a rough economy. I wrote a couple of weeks ago that getting stuck in a rough spot can produce some wonder opportunities if you're willing to step back and look at your options from a different perspective.

If you're in a tight spot, don't just try to muscle through it. Step back, relax in God's trustworthiness, and look around. You'll find a lot more options than you thought you had.