What counts as a startup cost?
Startup costs are expenses you incur before your business begins operations:
- Market research and feasibility studies
- Travel to scout business locations or meet potential customers
- Training and education before opening
- Legal and accounting fees for entity setup
- Advertising before launch
- Employee recruitment and training
These are different from organizational costs (filing fees, state registration), which have their own $5,000 first-year deduction.
The $5,000 / $50,000 rule
You can deduct up to $5,000 in the year your business starts. But there's a phase-out: for every dollar of startup costs over $50,000, the $5,000 deduction is reduced by $1.
If your startup costs are $53,000, your first-year deduction drops to $2,000. If they're $55,000 or more, you get $0 in year one and amortize everything over 15 years.
You spend $8,000 before your business opens: $3,000 on market research, $2,000 on legal fees, $1,500 on a website, $1,500 on advertising.
Year 1: Deduct $5,000
Remaining $3,000: Amortize over 180 months = $16.67/month ($200/year)
See IRS Publication 535 (Business Expenses), Chapter 8. Use Form 4562 to elect to amortize startup costs. Report the first-year deduction on Schedule C.
Track costs from day one
Start using Hivebooks before your business launches. Track pre-opening expenses in a dedicated category so they're ready for your first tax return.
Try Hivebooks Free →