Small Business: Deducting Startup Costs

Feb 20, 2023

 If you’ve recently started a business – or are thinking about starting a business – you should know that as an owner, all eligible costs incurred before you began operating the business are treated as capital expenditures. As such, they are part of the cost basis for the business.

Generally, the business can recover costs for assets through depreciation deductions. Businesses with costs paid or incurred after September 8, 2008, can deduct a limited amount of start-up and organizational costs enabling business owners to recover the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.

Business Start-up Costs

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. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for-profit and to produce income in anticipation of the activity becoming an active trade or business.

Examples of start-up costs include amounts paid for the following:

  • An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Advertisements for the opening of the business.
  • Salaries and wages for employees who are being trained and their instructors.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  • Salaries and fees for executives, consultants, or similar professional services.

Qualifying Costs

A start-up cost is recoverable if it meets both of the following requirements:

  • It’s a cost a business could deduct if they paid or incurred it to operate an existing active trade or business in the same field as the one entered into by the business.
  • It’s a cost a business pays or incurs before the day their active trade or business begins.

Nonqualifying Costs

Start-up costs don’t include deductible interest, taxes, or research and experimental costs.

Purchasing an Active Trade or Business

Recoverable start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business. Costs incurred to purchase a specific business are considered capital expenses and cannot be amortized.

Disposition of business

If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business.

Questions about deducting start-up costs for your small business? Help is just a phone call away.

 

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.