Deducting the start-up costs for a new business

Startup Costs versus Organizational Costs

  • Start-up costs are costs incurred in investigating the acquisition or creation of an active business (investigatory costs), and setting up an active business (pre-opening costs).
    • Investigatory Costs: These costs relate to your decision whether to start or purchase a business and which particular business to start or purchase. Examples include:
      • Analysis of products, labor supply, and transportation facilities
      • Fees for consultants and professional services
      • Surveys of potential markets
      • Travel costs for securing distributors, suppliers, and customers
    • Preopening Costs: These are costs incurred after you have made the decision to take the plunge and decided on a particular business, but before your business actually begins. Examples include:
      • Advertising the opening of the business
      • Promotional items for the grand opening
      • Salaries to employees for training (and their instructor(s))
      • Salaries to executives
      • Utilities
  • Organizational costs only apply to the creation of a corporation or partnership, such as accounting and legal fees.

How much can you Deduct Start-up Costs and Organizational Costs: You may elect to deduct up to $5,000 of start-up costs and$5,000 of organizational costs in the tax year your business begins (a $10,000 upfront deduction.) Any excess amount over $5,000 must be amortized over 15 years (180 months).

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