Understanding Start-Up Expenses and Tax Deductions
- Steve Julal
- Aug 20
- 2 min read
According to the U.S. Census Bureau, nearly 447,000 new business applications were filed in May 2025. Each of those applicants applied for an Employer Identification Number (EIN), marking the first step in launching a new venture.
If you’re among the many entrepreneurs starting out, it’s important to understand that not all start-up expenses can be deducted right away. How you categorize and handle these costs can have a significant impact on your federal tax liability.
How Start-Up Costs Work for Tax Purposes
When launching a business, keep these key rules in mind.
Start-up costs are defined as expenses incurred when creating or investigating the creation or acquisition of a business.
The tax code provides the opportunity to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs in the year your business officially begins operations, though this deduction is reduced if total start-up or organizational costs exceed $50,000.
Any costs that cannot be deducted immediately must be amortized over 180 months, or 15 years. It’s important to note that you cannot deduct or amortize these expenses until your business is actively operating. The IRS typically assesses whether you intended to make a profit, if you were regularly and actively involved, and whether your business began generating revenue to determine when operations officially start.
Examples of Deductible Expenses
Start-up expenses may include costs for researching a business idea, analyzing potential markets, or evaluating the purchase of a business.
Organizational expenses typically include legal or accounting fees related to setting up a corporation or partnership, as well as state filing fees.
For an expense to qualify, it must be something that would have been deductible if incurred after your business was already established.
Plan Ahead for Tax Savings
If you anticipate start-up costs, consider claiming deductions and keep detailed records. Careful planning at this stage may affect your future tax burden.
Our team can help you navigate the rules, maximize deductions, and handle the financial details of your new venture so you can focus on building your business. Learn more about our Business Formation services to get started.
