The tax code gives you a special break for your “start-up expenditures,” which are costs you incur in setting up your business even before your business opens to the public.
Here are some examples of start-up costs:1
Training new employees
Advertising for the opening of the business
Travel and related costs for securing prospective distributors, suppliers and customers
Capitalize and Amortize
Example. If your start-up costs total $150,000, you take $10,000 of deductions each full tax year until you recover the full $150,000.
As you can see, this can be a slow process.
To speed things along, you can also deduct $5,000 of your start-up costs in the year your business begins (or the total amount of your start-up costs, if less than $5,000).3
Phaseout. You can only take full advantage of the bonus deduction if you have less than $50,000 of total start-up costs.4
If your total start-up costs are greater than $50,000, then you lose some or all of the deduction. However, you can still take advantage of amortization and slowly recover your cost.
Technically you must make an election to receive the tax benefit for start-up expenses.5
Fortunately, the tax law now deems you to make the election even if you do not affirmatively choose to do so.6
1 IRS Publication 535, Business Expenses, published January 19, 2017, p. 26.
2 IRC Section 195(b)(1)(B). You calculate an equal deduction each month for the 180-month period starting when the business begins.
3 IRC Section 195(b)(1)(A).
4 IRC Section 195(b)(1)(A)(ii). The bonus deduction phases out dollar for dollar for every dollar above $50,000. Thus, if you have start-up costs of $55,000 or more, you do not get to take a bonus deduction.
5 IRC Section 195(b)(1).
6 Reg. Section 1.195-1(b).