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Starting a new business can be an expensive proposition, which is why the IRS allows new businesses to deduct up to $5,000 in start-up costs and $5,000 in organizational costs incurred in the first
START-UP AND ORGANIZATIONAL COSTS
Starting a new business can be an expensive proposition, which is why the IRS allows new businesses to deduct up to $5,000 in start-up costs and $5,000 in organizational costs incurred in the first year before operations commence. The IRS defines startup costs as those “incurred before you begin operations and include certain amounts paid to create a new active business or explore the acquisition of an existing active business”. Organizational costs may be incurred by partnerships or corporations (including single member LLCs and single member S and C corps) and include legal, accounting and filing fees associated with starting your business. The $5,000 first year deduction is reduced dollar-for-dollar for start-up costs exceeding $50,000, so companies that incur start-up expenses exceeding $55,000 are not permitted to take the first year deduction. Expenses in excess of the $5,000 limit are amortized over 180 months, or 15 years. Knowing how to treat your business’s startup and organizational costs can help you maximize your tax deductions and facilitate compliance with IRS regulations.
: Phil left his cushy job at a large firm to become an self employed marketing consultant on June 1 of the current year. He’s able to bring over several clients from his old firm to become the first clientele of his new company. He hires a lawyer to draft contracts for these clients as well as form and register his company, Highpoint Marketing LLC. The lawyer’s fees for these services is $5,000. He also hires a web developer to build and market Highpoint’s website, which cost $3,000. Phil is able to take the $5,000 start-up deduction in the first year, plus amortization of the excess $3,000, which is calculated as . The total of Highpoint’s first year deduction is $5,117.
Where to Take It: Start-up and organizational expenses fall under the “Other” category on line 27a of Schedule C. The “Other” total is calculated on Part V of Schedule C.
Schedule C (Form 1040) line 27a