Start up costs are those expenses incurred in planning and setting up the business, costs you incur before you open the door.
A portion of startup and organizational costs can be expensed (written off in your first year). The remainder can be amortized (written off over a period of 15 or more years). Here is how it works:
Expenses paid or incurred after October 22, 2004:
- You can deduct up to $5,000 in startup and $5,000 organizational costs as current expenses if the costs are under $50,000, respectively.
- You can choose to amortize startup and organizational costs greater than $5,000, respectively, (but less than $50,000, respectively) over a period of 15 years.
- If your startup or your organizational costs are more than $50,000, respectively, the excess amount reduces the amount you can deduct.
For example:
You opened a pet supply store in January 2016. You spent $52,000 to research the market, paint the building, hire a handyman to install shelves, pay for electricity and phone service before you opened the door to customers.
You can deduct $3,000 worth of startup costs as a current expense in 2016: $5,000 - ($52,000 - $50,000) = $3,000. And you can amortize the remaining $49,000 over 15 years.
Note: A cash-basis business cannot deduct or write off (amortize) these costs until they are actually paid.
Examples may include:
- Market Research
- Travel Costs
- Salaries
- Consulting fees
- Accounting and Legal Fees
- Pre-opening advertising expenses
- Overhead
- Employee Training
- Equipment
- 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 and consultants, or for similar professional services.
The items must have been purchased in connection with starting up the business. So, for example, if you're now using a printer in the business that your bought five years ago just because you needed a printer, that's not a startup expense.
