The Startup Tax Deductions Bible: What You Can Deduct by Entity Type and Stage
Written by Aparna Devalla, CPA
Curated by Rubric Financial
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The High-Value Deductions Most Startups Miss
- R&D EXPENSES: §41 credit AND §174 deduction. Post-OBBBA 2025: R&D can be deducted immediately (vs 5-year amortization). Combined with §41 credit (typically 6-14% of qualifying expenses), startups capture $50K-$500K/year. Most miss the §41(h) payroll-tax offset which lets pre-revenue startups monetize credits as cash.
- STARTUP COSTS: §195 + §248. Pre-operational expenses (legal incorporation, market research, business plan) can be deducted up to $5K in Year 1 + amortized over 15 years for the rest. Often deducted as ordinary operating expenses instead, which is wrong.
- STOCK-BASED COMPENSATION: properly accrued under ASC 718, deductible to the corporation as compensation expense. Most early-stage startups don't track SBC properly and lose the deduction.
- BAD DEBT: direct write-off method available for accrual taxpayers. Often overlooked when customers don't pay.
- STATE R&D CREDITS: stack on federal §41. CA, NY, MA, CT, NJ all have 10-20% additional credits. Most startups claim federal but not state.
Related Resources
The Income Tax Provision Under ASC 740
An overview of the ASC 740 income tax provision, covering deferred tax assets and liabilities, valuation allowances, and why unprofitable startups still record a provision.
Tax & ComplianceQualified Small Business Stock (QSBS)
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Tax & ComplianceState R&D Tax Credits: A Founder's Guide to Stacking Federal and State Credits
Most states offer their own R&D credits on top of the federal §41 credit. State-by-state overview for the most-claimed jurisdictions and how to maximize total credit.
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