Starting Your Business

What are Business Expenses

Start-up Costs

Start-up costs are costs for setting up an active trade or business or investigating the creation or acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with an activity engaged in for profit or for the production of income in anticipation of the activity becoming an active trade or business. You can elect to deduct up to $5,000 of business start-up costs paid or incurred after October 22, 2004. The costs that are not deducted can be amortized.

To be amortizable, your start-up cost must meet the following tests.

1. It must be a cost you could deduct if you paid or incurred it to operate an existing trade or business.
2. You must pay or incur the cost before you begin your business operations.

See Chapter 9 in Publication 535.

Start-up costs include what you pay for investigating a prospective business and getting the business started. They may include costs for the following items:

• 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, and
• Salaries and fees for executives and consultants, or for similar professional services.

Start-up costs do not include deductible interest, taxes, and research and experimental costs. See "Research and Experimental Costs” in Publication 535.

Important References:

Publication 535        Business Expenses
Form 4562                Depreciation and Amortization
Instruction for 4562  Depreciation and Amortization