Lean startups leverage tax deductions

Tax deductions are crucial to the launch of a lean startup.

Second only to a profitable business model in financial importance, tax deductions are crucial to a lean startup. Business taxes can absorb a business' profit for months - Clydebank estimates that it takes a full quarter for a small business to generate enough profit to exceed their tax responsibilities (loc. 576). For a startup with limited fund runway, taxes can quickly shorten the duration an entrepreneur has to iterate on their business model. An entrepreneur with little initial investment is wise to review the tax deductions available in her nation, state, county, and city, and to orient herself to take advantage of as many deductions as she can without hampering her business. This may mean registering an office in her home to use the home office deduction, calculating travel distance to gain tax deductions on mileage, or employing a spouse to gain tax deductible labor.

How many entrepreneurs would list tax deductions as one of the most important ways to succeed? If lean startups require financial runway to iterate the business model to be profitable in the marketplace, then finding ways to reduce the government’s cut means more runway to work with.

Deductions require some foresight for entrepreneur’s to take advantage of them. Travel deductions require an audit-friendly classification of expenses from travel. This can be car mileage, hotel stays, and more, but an entrepreneur needs to keep record of these costs in order to deduct them during tax season. More than receipts alone, the entrepreneur may need to choose their travel priorities differently to ensure business and social engagements don’t become so entangled that an audit of their expenses would put their deductions at risk. Vehicle travel deductions have multiple options that an entrepreneur must weigh ahead of time to select the deduction which best suits their case. Mileage deductions may not be worthwhile if the vehicle is old and not often used. Instead, a deduction on vehicle maintenance may be a better fit. An entrepreneur that prioritizes learning the tax system and its deductions will take advantage of the best tax opportunities in their region.

Whether I’m grateful for or angry about taxes, if I don’t take advantage of deductions readily available to my company I forfeit income that could have been invested in my startup. Established businesses can calculate deductions from a dedicated accounting department and consider it part of their operating cost, but I would not have considered recording optionally-deductible business expenses a part of business operation overhead. My application, whether in the United States or elsewhere, is to exhort entrepreneurs to review the national, state, county, and city tax deductions that could apply to their startup and to take whatever actions are necessary to record and submit these deductions for their annual taxes. This is all the more crucial for a startup in a foreign context, since deductions that may be common knowledge could be easily overlooked by the entrepreneur.

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