Startup costs

Understand what startup costs are, what qualifies, and how they’re treated for tax purposes — deduction, amortization, or capitalization. Also known as: pre-operating expenses, business formation expenses, opening costs.

Overview

Table of Contents

Key Information

Startup costs are the expenses incurred during the process of establishing and launching a new business. These costs can be broadly categorized into two phases:

Pre-opening: Expenses associated with planning, research, and setting up the business before it officially opens its doors.
Post-opening: Ongoing expenses essential for operating the business in its initial stages.

Examples:

Website development
Logo design
Market research
Legal fees
Business licenses and registrations
Marketing

Tax Impact

Startup costs can be treated differently for tax purposes depending on the specific expense and the business structure. Some common scenarios include:

Deductible expenses: Certain startup costs can be deducted as business expenses in the year they are incurred, reducing the taxable income of the business. This applies to expenses that are ordinary and necessary for the business and wouldn't be considered capital expenditures.
Amortization: Some startup costs, like software development or legal fees associated with intellectual property, might need to be amortized over a period of several years. This means spreading the cost deduction over time.
Capitalization: Certain assets acquired during the startup phase, like equipment or furniture, might be considered capital expenditures and need to be depreciated over their useful life instead of being fully deducted in the year of purchase.