Tax Time: Small business gets a break on start-up expenses

By Brian Kelsch
When and how do I deduct expense incurred before I opened my business?
Most new business and rental property owners will pay or incur expenses for investigating the viability of a business and expenses before actually opening the business or renting the property. These expenditures are known as start-up costs, and examples include analysis of potential markets and products, advertisements for the opening of the business, salaries and wages for training and education, and other expenditures that would normally be deductible if the business were open. These costs are covered in Internal Revenue Code 195 expenditures and have specific rules on when and how a tax deduction is elected.
The law requires these costs to be capitalized and not automatically deductible in the current year as a periodic cost. However, an election may be made to expense up to $5,000 of these costs in the year in which the business opens. This $5,000 deduction is reduced dollar for dollar once start-up costs exceed $50,000. Thus, if start-up expenditures exceed $55,000, no deduction is allowed. The election is made on Part IV of Form 4562 and is due by the date of the return including extensions. The remaining balance of start-up expenses must be amortized over 15 years or 180 months. If the trade or business is disposed of before start-up expenses are fully amortized, the remaining costs may be deductible in the year the business closes.
The organization costs of business entities are often confused with start-up expenses. Although there are similarities in how they are treated by the IRS, they should be segregated. The IRS considers these expenses a separate cost, and consequently a separate election is made for organizational costs.
Electing to deduct all or portion of start-up expenses depends on the particular situation of the business, the owners of the business, and future operations. You should always speak with your trusted advisers about your particular situation.

Brian Kelsch is a Certified Public Accountant at Gamwell, Caputo & Co., PLCC in Conway, and can be reached at (603) 447-3356. You can also follow him on twitter @bkelschcpa or on his blog He welcomes any article feedback or questions for future article consideration.