Generally, business start-up and organizational costs are considered capital expenditures, recorded as assets, and amortized over time. However, business owners may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs. The $5,000 deductions are reduced by the amount that the total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over a 180-month period starting with the month the trade or business begins to operate.
What Qualifies as a Start-Up Cost?
Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. A start-up cost is recoverable if it is (1) a cost the business could deduct if it paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into or (2) a cost a business pays or incurs before the day their active trade or business begins. Common examples of start-up costs include the travel and other necessary costs to securing suppliers, distributors, or customers; costs to train employees; costs to advertise; and costs to survey potential markets.
What Qualifies as an Organizational Cost?
Organizational costs include the costs of creating a corporation or partnership. An organizational cost is recoverable if it is (1) for the creation of the corporation, (2) chargeable to a capital account, (3) amortized over the life of the corporation if the corporation had a fixed life, and (4) incurred before the end of the first tax year in which the corporation is in business. Common examples of organizational costs include the cost of legal services, temporary directors, organizational meetings, and state incorporation fees.
How Do I Make the Election?
You elect to deduct start-up or organizational costs by claiming the deduction on your income tax return in which the active trade or business begins. If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions), indicating the election on your amended return, and writing “Filed pursuant to section 301.9100-2.”
