Expenses that meet the following two requirements are considered "start-up" expenses:

1) Paid or incurred in connection with:

  • Investigating the creation or acquisition of an active trade or business.
  • Creating an active trade or business.
  • Any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of that activity becoming an active trade or business.

2) It must be a cost that would have been allowable as a deduction if it were paid or incurred in connection with an existing active business in the same field as that entered by the taxpayer.

Note that interest expenses, taxes, and research and development costs are not considered start-up expenses.

Can I Deduct the Expenses for Starting My Business?

Generally, start-up expenses paid or incurred are not currently deductible and must be capitalized. The taxpayer may elect to amortize these expenditures over a period not less than 60 months starting with the month in which the business begins.

For start-up expenses paid or incurred after October 22, 2004, the taxpayer may elect to currently deduct start-up expenses up to $5,000. This amount is reduced (but not below zero) by the amount of start-up expenses that exceed $50,000. Any remaining start-up expenses after the current deduction election will be capitalized and amortized over a 180-month period.

Start-up expenditures are usually expenses paid or incurred by the taxpayer in acquiring or creating a new business; costs to expand an existing business are not considered "start-up" expenditures.

Can I Deduct the Investigatory Expenses If I Decide Not to Create a New Business?

Maybe. The taxpayer may be able to deduct investigatory expenses even though he or she later decides not to engage in the business if sufficient amount of time and expenses is incurred in preparation to starting the business. However, the deductibility of these expenses varies by the facts and circumstances of the taxpayer.

Do I Need an Attorney to Help Me With Start-up Expenditures?

If you are starting a new business, you should definitely consider contacting an experienced business lawyer. Your lawyer will help you understand the start-up process and can assist you with any tax issues related to new business expenditures.