IRS Tax Tip 2021-166, November 9, 2021
When starting a business, owners should treat all eligible costs incurred before beginning to operate the business as capital expenditures that are part of their basis in the business. Generally, the business can recover costs for assets through depreciation deductions.
For costs paid or incurred after September 8, 2008, the business can deduct a limited amount of start-up and organizational costs. They can recover the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.
Business start-up costs
Start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and to produce income in anticipation of the activity becoming an active trade or business.
Qualifying costs
A start-up cost is recoverable if it meets both of the following requirements:
- It’s a cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.
- It’s a cost a business pays or incurs before the day their active trade or business begins.
Start-up costs include amounts paid for the following:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business.
- Salaries and wages for employees who are being trained and their instructors.
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
- Salaries and fees for executives and consultants, or for similar professional services.
Nonqualifying costs
Start-up costs don’t include deductible interest, taxes, or research and experimental costs.
Purchasing an active trade or business
Recoverable start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business. Costs incurred to purchase a specific business are capital expenses that can’t be amortized.