Starting your own therapy practice doesn’t come cheap. Luckily, the start-up expenses deduction for therapists can help you reduce costs.
Here’s everything you need to know about the deduction and how you can claim it.
(Still in the planning stages? Check out our article, How Much Does it Cost to Start a Therapy Practice?)
What is the start-up deduction for therapists?
The start-up expense deduction is available to all businesses that incur expenses before they become active.
That means money you spend to create your practice—to turn it from an idea on paper into a real, operating business.
In the words of the IRS:
Start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business.
Even if you incur startup expenses over multiple years prior to launching, you report them on the first tax return your business files.
Startup expenses in excess of $5,000 aren’t deducted immediately, but must be amortized, or deducted over multiple years. (More on that shortly.)
Which start-up expenses are deductible?
Start-up expenses are split into two categories:
- Business start-up expenses, which includes costs associated with researching a new business opportunity and preparing for launch
- Organizational costs, which includes the cost of forming a business entity
(For more about business entities, see How to Choose a Business Entity for your Therapy Practice.)
Business start-up expenses
Before you launch your own therapy practice, it’s a good idea to do some research and create a business plan. You’ll want to make sure your new business will be profitable—that there’s demand for your services, and that your revenue will exceed your profits.
The costs associated with doing this research are deductible. Qualified expenses include:
- Fees for consulting with lawyers or accountants
- The cost of hiring business or market research consultants
- Costs associated with doing your own market research (access to publications and periodicals)
- Expenses associated with finding an office space and leasing it
- The cost of furniture and other items (work computer, HIPAA-compliant records storage) for your office
- Wages or salaries you pay to any staff members (eg. an admin assistant) while you train them
- Advertising you run prior to opening your practice
By default, when you go into business for yourself and become self-employed, the IRS considers you a sole proprietor.
But there are benefits—greater liability protection, and potential tax savings—to forming a different business entity for your therapy practice. For instance, many therapists launching their own practices choose to form a limited liability company (LLC).
Forming a business entity often costs money, and the expense is deductible. Examples include fees associated with:
- Registering an LLC at the state level
- Filing articles of incorporation
- Registering a doing business as (DBA) name
- Consulting with lawyers, accountants, or other professionals, or hiring them to fill out forms and file them on your behalf
- Holding meetings with partners or stakeholders in your new entity
Which start-up expenses are not deductible?
Any costs you incur once you start practicing as a self-employed therapist are no longer start-up expenses, but regular deductible expenses.
But there are also some costs that don’t qualify as start-up expenses even if you incur them before going into business.
Namely, any real estate taxes you need to pay, or any fees associated with transferring capital (cash or other assets) to your new business entity are non-deductible.
It’s a good idea, before claiming any startup expenses, to run them by an accountant and get their approval.
How much can you deduct from your start-up expenses?
There’s a hard limit on how much you can deduct as startup expenses your first year in business. You’ll need to amortize—gradually deduct—any expenses over that limit.
So long as you’re deducting $50,000 or less in startup expenses, you can write off up to $5,000 your first year in business. The remaining expense must be amortized.
Amortization takes place over a period of 180 months (15 years). Meaning, for your first 15 years in business, every year you’ll deduct a fraction of your initial startup expenses.
If all these details have your head spinning, don’t worry. It’s easier to understand with an example.
- Suppose you incur $20,000 in deductible start-up expenses before your practice goes into business.
- Your first year in business, you can deduct $5,000 of your start-up expenses all at once. That leaves $15,000 in depreciable expenses.
- Over the next 15 years, you deduct a fraction of the remaining $15,000 each year. (At a rate of $83.33 per month.)
Calculating amortization can be a bit tricky. This is only a simplified example.
That’s why, if you incur more than $5,000 in start-up expenses, it’s a good idea to talk to an accountant before you file.
Claiming start-up expenses over $50,000
If you plan to deduct over $50,000 in startup expenses, the amount you can claim your first year as one lump sum (rather than as an amortized expense) is reduced.
Specifically, for every $1.00 you claim over the $50,000 limit, you are able to claim $1.00 less than $5,000.
- Suppose you plan to claim $52,000 in start-up expenses
- Since $52,000 is $2,000 more than $50,000, you can only claim $3,000 your first year in business. (Because $5,000 - $2,000 = $3,000.)
- Once you claim that $3,000 lump sum, you’ll have $49,000 left to amortize. (Because $52,000 - $3,000 = $49,000.)
- You write off the remaining amount over fifteen years at a rate of $272.22 per month. (Because $49,000 divided by 180 is $272.22.)
Again, this is a simplified example. Before paying off any start-up expenses on an amortization schedule, consult with an accountant.
How to claim the start-up expense deduction
If you’re a sole proprietor or single-member LLC, you report your startup expense deduction in Part V of Schedule C, Form 1040.
If you’re amortizing some of that expense, you’ll need to fill out and file Form 4562 (Depreciation and Amortization) along with your first year’s tax filing.
Looking for more ways to reduce your tax bill your first year in business? Check out our complete list of tax deductions for therapists.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.