There are specific IRS tax rules that relate to deducting start-up and organizational costs for launching a business. 

Start-up costs include amounts paid or incurred to create an active trade or business or to investigate the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or a partnership. These costs are generally capital expenses, but by election, can be deducted or amortized, starting with the month the active trade or business begins. The discussion in this section deals primarily with business start-up costs.

Taxpayers can elect to deduct up to $5,000 of start-up and $5,000 of organizational expenses in the first year of a business. Each of the $5,000 amounts is reduced by the amount by which the total start-up expense or organizational expense exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years. (IRC Sec 195) If a taxpayer who incurred start-up expenses does not make the election, the start-up costs must be capitalized, meaning that the expenses can only be recovered upon the termination or disposition of the business. (Under prior law, start-up costs were capitalized unless an election was made to amortize them over no less than 60 months.) All start-up and organizational costs related to a particular business, regardless of when incurred are to be considered in determining whether the cumulative cost of the start-up or organizational expenditures exceeds $50,000.

The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins. The return must be filed by the extended due date. On Schedule C, the deduction is taken as part of the “Other Expenses” in Part V. If the entire amount of start-up costs isn’t deductible in the business’s first year, use Form 4562 to amortize the excess amount over 180 months.

A qualifying start-up cost is one that would be deductible if it was paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Examples of qualified start-up costs include:

Start-up costs don’t include interest, taxes, or research and experimental costs. Depreciable items aren’t included in start-up expenses either--begin depreciation when the business actually begins (i.e., when the assets are “placed in service”).

For a purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

If a business closes operations before start-up costs are fully amortized, deduct remaining costs as an ordinary loss (Form 4797).