Most founders obsess over their pitch deck, but leave thousands in IRS refunds on the table.

The IRS lets you write off $5,000 of qualified startup costs in your first year and another $5,000 of organizational costs the same year, with any excess spread over 15 years.

If founders don't track or categorize these costs correctly, they overpay taxes and drain cash flow when capital is most expensive.

This article breaks down the most overlooked deductions and credits—from Section 179 expensing to the R&D payroll-tax offset—and shows exactly how to claim them. Whether you’re pre-revenue or scaling fast, these savings add real runway.

Quick-Start Cheat Sheet: 15 High-Impact Deductions

Many founders pay the IRS more than they need to because they rush through the return at the eleventh hour. Below you’ll find over a dozen high-impact deductions that could save you thousands right now.

To give you a head start, here's a table with the deductions and credits that move the needle fastest. Keep it handy when you—or your bookkeeper—sit down with the return.

The two $5,000 deductions at the top are often the easiest cash wins you'll claim in year one. Miss them and you'll be stuck amortizing pennies for the next 180 months. That's real money left on the table while you're trying to extend runway.

Section 179 and bonus depreciation work together like a one-two punch. If your first-year income is low, lean on bonus depreciation to create or increase a net loss that can be carried forward. Think of it as banking tax savings for when you actually start turning a profit.

The standard mileage and home-office write-offs require solid records, but nothing complicated. Snap pictures of your odometer on January 1 and keep a floor-plan diagram of your office space.

The R&D credit deserves special attention here. As Town's Head of Tax Anjum Tunuli reminds founders, startups running at a loss can't use traditional deductions to cut an income tax bill that doesn't exist—but they can turn qualified research spending into a payroll-tax offset of up to $500,000 a year. 

If you're building software, refining a prototype, or hiring engineers, make R&D documentation a weekly habit. Pass-through or C-Corp, profitable or not, the credit puts real cash back in your runway when every dollar counts.

Startup Tax Deduction Categories

Investigative Expenses

Before your first invoice goes out, every dollar you spend figuring out whether the idea is worth pursuing counts. The IRS labels these "investigative expenses," and they include surveys, competitor deep-dives, and even flights to scout suppliers. Track the airfare, hotel, and paid data reports—you can fold up to $5,000 of those costs into the deduction bucket and deduct (amortize) the remaining costs evenly over over 15 years. 

Founders routinely shave four figures off their first-year tax bill simply by digging up old Uber receipts from a city they later decided not to sell in. The lesson: document everything, even the trips that convinced you to pivot.

Organizational Costs

Incorporation paperwork, state filing fees, and attorney time for drafting bylaws all fall under "organizational costs." They're separate from investigative costs and enjoy their own $5,000 first-year write-off, with any excess spread over 180 months.

A Delaware C-Corp that spent $9,500 on formation last year can deduct $5,000 now and roughly $300 a year thereafter. The same phase-out applies once total costs top $50,000.

Equipment and Depreciation

Buying equipment is one of the biggest early expenses. Here's how to turn that into upfront tax savings. Hardware, servers, laptops, and certain software qualify for first-year expensing through Section 179 up to the annual limit. Anything above that is still eligible for 100% bonus depreciation, as permanently restored for property acquired after January 19, 2025. For example, if you buy $120,000 of gear, you can elect Section 179 on $70,000 and claim bonus depreciation on the remaining $50,000—writing off the entire $120,000 in year one

Pro Tip: Section 179 is applied first, reducing your remaining basis. Bonus depreciation then lets you fully expense the leftover amount, maximizing your first-year deductions.

Home Office Deduction

Running your startup from the spare bedroom? The "regular and exclusive use" test scares many founders into leaving dollars unclaimed, yet legitimate home offices are perfectly audit-resistant when documented. 

Choose the simplified method—$5 per square foot up to 300 sq ft—if you want quick math. On a 150 sq ft workspace that's a $750 deduction with zero paperwork beyond noting the room size. 

If your actual costs run high, the long-form method may beat it; keep utility bills and floor plans on file so you can switch methods in a future year without hassle.

Vehicle Expenses

You have two paths for vehicle expenses: standard mileage or actual costs. The mileage rate changes annually—grab the IRS number published each January and multiply by every business mile you log. 

If you drive a paid-off sedan that rarely needs repairs, mileage wins. Leasing an SUV and filling it with product samples? Total your gas, lease payments, insurance, and maintenance; actual expenses may dwarf the mileage allowance. Either way, a logbook is non-negotiable. Snap a photo of the odometer on January 1 and again on December 31—those two shots are your audit insurance.

R&D Credit

If you're building new software, experimenting with prototypes, or improving an existing process, the IRS calls that qualified research. Unlike deductions, the R&D credit cuts your tax bill dollar-for-dollar and, for pre-revenue companies, can offset up to $500,000 of employer payroll tax each year for five years. 

Founders routinely miss this because they file too late—Form 6765 has to ride along with the original return and cannot be done on the amended return. Capture engineers' wages, cloud-computing costs, and contractor invoices early, tag them as "QRAs" (qualified research activity) and stash statements in a shared drive. Many states sweeten the pot with their own credits, so one data archive can unlock multiple checks.

Payroll and Hiring Credits

W-2 wages, employer payroll taxes, and benefits hit your income statement now and your tax return later as deductions. Hiring from targeted groups (veterans, long-term unemployed, SNAP recipients) may bring a Work Opportunity Tax Credit worth up to $2,400 per employee. Contractors are simpler—no payroll tax match on your end—but you can't claim the credit and you must send 1099-NECs. 

If you're an LLC or S-Corp owner-operator, pay yourself a "reasonable salary" first; dividends or draws above that salary dodge self-employment tax without jeopardizing deductions for fringe benefits your C-Corp peers enjoy.

Branding and Marketing Costs

Branding, website design, and pre-launch ad spend feel like operating expenses, yet the IRS treats them as costs until you open doors. That means they share the $5,000 immediate deduction cap with your other investigative expenses. Post-launch, the same Google Ads are 100% deductible in the year paid. Trademark filings and logo design fees create intangible assets amortized over 15 years; lump them in your "other intangibles" schedule so you don't forget the annual write-down.

Insurance and Licensing

General liability premiums, cyber policies, and "key person" life insurance (when the business is beneficiary) are deductible once coverage starts. City business licenses and state seller permits hit the return immediately unless they cover more than 12 months, then you prorate. 

Founders often prepay a full year of insurance to lock in a discount; you can still deduct only the portion that applies to the current tax year, so record the unused months as a prepaid asset instead of expense.

Retirement Plan Credits

SECURE 2.0 increased the incentive for small businesses to launch 401(k)s. You can collect a credit equal to 100% of setup and admin costs up to $5,000 per year for the first three years, plus $500 for adding automatic enrollment. Start the paperwork in Q3 so your plan is live by January 1, otherwise you lose a year of credit. 

Pairing the credit with deductible employer matches means Uncle Sam helps fund your team's future and covers a slice of the bill today.

When Business Operations Begin 

The IRS doesn’t care how excited or stressed you are about your launch—they care about when you actually start doing business. If you never officially “open for business,” your startup costs don’t count as deductible expenses. They’re just personal capital losses, with minimal tax benefit.

The IRS generally considers a business to have begun operations when it has all the necessary components in place to start generating revenue, not just preparatory activities. Examples of beginning business can include acquiring necessary operating assets, obtaining inventory, and "setting up shop." It's about readiness to conduct the core business activity. That’s your official launch date. From a tax standpoint, it’s critical to document it. Because once you’re open, you unlock the startup-cost deduction: you can deduct up to $5,000 of startup costs in your first year and amortize the rest over 15 years. Same deal for up to $5,000 in organizational costs.

So pick your launch date carefully—but don’t wait forever. The IRS wants to see an operating business, not just an expensive idea you never acted on.

Pro Tips to Maximize Savings as You Scale

Cash flow matters when you're growing from launch to scale, yet most founders miss thousands in savings because they treat taxes as an afterthought. Here's how to keep more of every dollar as your revenue and complexity grow.

Stack Credits Before You Turn Profitable

• The federal R&D credit eliminates up to $500,000 of payroll tax each year for  five years for qualifying companies

• Work Opportunity Tax Credit saves up to $9,600 per qualifying hire

• Small-employer pension credit adds value when you establish a 401(k)

These three incentives alone can offset six figures of early payroll costs without affecting your income statement.

Maximize Equipment Deductions Strategically

• Bonus depreciation and Section 179 let you expense equipment up to the annual cap in the year you place it in service

• If expecting losses this year but profits next, delay six-figure hardware orders until January

• If you need the deduction now to stay in the 21 percent corporate bracket, complete purchases before December 31

Note: The $50,000 threshold and $5,000 first-year write-off apply to start-up costs, not equipment purchases. Equipment purchases are subject to their own separate deduction rules (Section 179 and bonus depreciation) with their own limits, completely independent of the Section 195 startup cost rules.

Choose the Right Entity Structure for Your Stage

• An LLC taxed as a sole proprietorship keeps administration simple

• Switching to an S-Corp once profits exceeds roughly $200,000 may save you some tax dollars, but this structure is not recommended for companies seeking outside capital

• For venture funding, a C-Corp enables unlimited shareholders and multiple stock classes

• C-Corps allow certain fringe benefits to be deducted at the corporate level

Optimize the Interaction Between Credits and Deductions

• Credits apply after taxable income is calculated

• Aggressive deduction use can reduce the base a payroll-offset credit needs

• Map out the sequence each quarter rather than scrambling at year-end

Implement Quarterly Tax Reviews

• Schedule a 30-minute tax review every quarter

• Bring updated financials, hiring plans, and purchase wish lists

• Confirm you're in the best entity for your stage

• Verify expensing decisions haven't reduced your credits

• Organize documentation before audit clocks start running

Four short meetings annually may translate into five- or six-figure savings with far less stress every April.

Make the Most Out of Your Tax Deductions

Most founders leave money on the table because they treat taxes as an afterthought instead of a growth tool.

Five steps put thousands back in your pocket: deduct the first $5,000 and $5,000 of organizational costs, then amortize the rest over 15 years, expense equipment immediately with Section 179 and 100% bonus depreciation, claim R&D and hiring credits, and document everything. 

At Town, our startup-focused tax professionals transform complex tax rules into extended runway for founders. While most accountants focus on compliance, we build strategic tax roadmaps aligned with your funding timeline and growth milestones, putting real dollars back into your business when capital efficiency matters most. 

We work with many startups and have saved them thousands annually. Let’s see if we can help extend your runway: sign up to schedule time with our team.