Quick note: This guide is for general education. Tax rules change and your facts matter—run major moves by a professional. If you’re in California, state rules often differ from federal.
Contents
1) Start-up & Organizational Costs
You can generally deduct up to a portion of qualifying start-up and organizational expenses in the first year your business begins, with the remainder amortized over 15 years (180 months). Qualifying items often include market research, advertising to launch, travel to line up suppliers or customers, legal fees to form the entity, and state filing fees.
What usually qualifies
- Pre-launch marketing and surveys
- Travel to evaluate suppliers/customers
- Attorney fees to draft formation documents
- State filing fees and registered agent costs
- Accounting fees to set up books
What usually does not qualify
- Assets and equipment (handled under depreciation/§179)
- Interest, taxes, or research after you’re already operating
- Costs to acquire another business
Pro tip: Create two simple buckets in your bookkeeping: Start-up costs and Organizational costs. That makes the first-year deduction and the amortization entry straightforward.
California call-out
California generally follows the federal treatment for start-up and organizational costs. However, California’s entity rules add cash-flow considerations: most corporations and LLCs owe a minimum franchise/annual tax (commonly $800) and may have additional fees (e.g., LLC gross-receipts fee). Some new entities qualify for a first-year minimum-tax exception—check the current year’s rules before filing.
Documentation checklist
- Engagement letters and invoices (legal, accounting, marketing)
- Receipts for state filing and registered agent fees
- Travel logs (dates, purpose, who you met)
- Board/member consent documenting the amortization election
2) Home Office Deduction
If you use part of your home regularly and exclusively for business, you can deduct a portion of housing costs. You can choose the simplified method (a flat rate per square foot up to a cap) or the actual-expense method (allocate rent/mortgage interest, utilities, insurance, HOA, and repairs based on business square footage).
When it works well
- Your primary workspace is at home (no other fixed office)
- You meet clients there or store inventory/samples
- You run admin/management of the business from that room
Watch-outs
- Space must be exclusively business—no guest room / personal use
- W-2 employees can’t take this deduction; it’s for business owners
- Repairs for the whole home are allocated; direct office repairs are 100%
California call-out
California largely conforms to federal home-office rules. Keep in mind state/local utility taxes and California’s property-tax nuances do not affect eligibility but will change the allocation under the actual-expense method. Save your utility and property tax statements.
Quick example (actual-expense method)
200 sq ft office ÷ 1,000 sq ft home = 20% business use. If annual eligible costs are $18,000, your indirect home-office deduction is $3,600. Direct office-only repairs (e.g., painting that room) are added on top.
3) Equipment & Software (Section 179, Bonus Depreciation & De Minimis Safe Harbor)
Founders often buy laptops, servers, machinery, tools, and subscriptions in year one. The tax code gives multiple ways to expense these:
- Section 179 expensing: Elect to deduct the full cost of qualifying tangible property (including off-the-shelf software) in the year placed in service, up to the current federal dollar limit (indexed annually). Phase-out applies for very large purchases.
- Bonus depreciation: For new or used eligible property with a life of 20 years or less. The available percentage phases down under current law—still a major accelerator for many startups.
- De minimis safe harbor: If you have a capitalization policy and each item is under your chosen threshold (commonly $2,500 per item for small businesses), you may expense it without tracking depreciation.
Placed-in-service matters
You can’t deduct gear until it’s ready and available for use in your business. Ordering in December but receiving/using it in January means the deduction belongs to January’s tax year.
California call-out
California does not conform to federal bonus depreciation and has a much lower Section 179 limit than federal law. Practically, you may get a full write-off on your federal return but a slower write-off on your California return. Plan for the state-tax cash impact—especially in equipment-heavy startups.
Documentation checklist
- Invoices showing item description and cost
- Proof of payment and delivery/installation date
- Capitalization policy (for de minimis safe harbor)
- Fixed-asset register tracking serial numbers and locations
4) Research & Development (R&D) Credit
Building new products, features, or processes? The R&D credit can be a game-changer. Early-stage companies may be able to apply up to a portion of the federal credit against payroll taxes, improving cash flow even before profitability.
What activities often qualify
- Software engineering and prototyping
- Hardware design and bench testing
- Experimental iterations to improve performance or reliability
- Formulation work in biotech, ag-tech, or materials
Costs that can count
- W-2 wages for qualified technical staff
- Contractor expenses (a portion may qualify)
- Supplies consumed in experiments
- Cloud compute used for testing
To claim, you’ll file the federal credit on Form 6765. If you use the payroll-tax offset as a qualified small business, your credit is claimed on your quarterly payroll return. Strong documentation—project lists, time-tracking, experiment notes— is essential.
California call-out
California offers its own R&D credit (filed on the state return), which can significantly reduce California income/franchise tax, but it does not offset payroll taxes and is non-refundable. Unused credit may carry forward subject to state rules. The California definition of qualified research is similar but not identical to federal—coordination matters.
Field-tested tip
Stand up a lightweight “R&D memo” each quarter: goals, uncertainties, iterations, who worked on what, and links to tickets/PRs. It makes credit substantiation far smoother if examined.
5) Health Insurance Premiums (Self-Employed)
Self-employed owners can often deduct up to 100% of health, dental, and qualifying long-term-care premiums paid for themselves, a spouse, and dependents—even if you don’t itemize. The deduction reduces adjusted gross income.
How ownership type affects it
- Sole proprietors/LLC single-member: Deduct on your individual return up to business profit.
- Partners/LLC members: Generally deducted via the K-1 treatment for self-employed health insurance.
- S-corp >2% shareholders: Premiums should be included in your W-2 wages; then you take the above-the-line deduction on your return.
Common pitfalls
- Deduction can’t exceed earned income from that business
- Coordination needed if you also receive a premium tax credit
- Make sure the S-corp has a reimbursement/plan document in place
California call-out
California generally follows the federal self-employed health-insurance deduction. However, California does not allow a deduction for Health Savings Account (HSA) contributions—even though federal law does—so plan accordingly if you use HSAs.
Bonus Write-offs Worth a Look
- Business mileage: Track miles for founder errands, client visits, and supply runs. A clean mileage log is gold.
- Education: Courses and professional books that maintain or improve skills used in the business.
- Business meals (generally 50%): Save the receipt and note who and what business purpose.
- Advertising & launch marketing: Founder-led brand design, website, ads, and launch events.
- Software subscriptions: Project management, cloud, design tools—document business use.
- Interest & bank fees: On business accounts and cards used for operations.
California Taxes Every Startup Should Plan For
- Minimum franchise / annual tax: Most corporations and LLCs owe a minimum amount each year (commonly $800). Some newly formed entities may have a first-year exception—verify current rules.
- LLC gross-receipts fee: In addition to the annual tax, California LLCs can owe a fee based on total California gross receipts once you exceed certain thresholds.
- S-corporation tax: California taxes S-corp income at a state entity rate (commonly around 1.5%) with a minimum tax as well. Shareholders also pay California tax on their share.
- C-corporation tax: California imposes a franchise tax rate on C-corps (with a minimum tax). Factor this into burn-rate planning.
- Local taxes: Some cities (e.g., San Francisco) have additional gross-receipts or payroll taxes—check city rules where you have nexus or employees.
- State conformity differences: California does not conform to the federal 20% pass-through deduction (IRC §199A), to federal bonus depreciation, or to HSA deductions. Your state bill can differ meaningfully from your federal one.
Founder’s Year-End Checklist
- Reconcile books; categorize start-up vs. operating vs. fixed-asset purchases
- Run an equipment plan: Section 179 vs. regular depreciation vs. bonus (federal) and California impact
- Capture home-office square footage and utility totals
- Export a mileage log or create one from calendar/Maps + odometer
- Inventory R&D projects; gather time sheets and experiment notes
- Confirm owner health-insurance setup (especially >2% S-corp shareholders)
- Estimate California state taxes and city taxes; calendar due dates
Want this handled for you?
We help California founders set up clean books, choose the right write-offs, and file accurately—without surprises at tax time.
Book a free consultationFrequently Asked Questions
Do I have to choose between Section 179 and bonus depreciation?
You can mix them. Many founders expense some assets under §179 and use bonus/regular depreciation for the rest. The optimal mix depends on profits, future tax rates, and California non-conformity.
Can I take the home-office deduction if I sometimes work at a coworking space?
Yes, as long as your home office is your primary place of business and meets the regular & exclusive use test. Occasional use of other spaces doesn’t automatically disqualify you.
We’re a pre-revenue tech startup. Is the R&D credit still worth it?
Often, yes. The federal credit can offset employer payroll taxes for eligible small businesses, producing real cash savings before profitability. Keep strong documentation from day one.
Are meals during fundraising trips deductible?
Meals while traveling for business are generally 50% deductible. Keep the receipt and note the business purpose. Entertainment costs remain nondeductible.