Do startup costs include the cost of forming my LLC or corporation?

Organizational costs (forming the entity) are treated separately from startup costs under a parallel set of rules — Section 248 for corporations and Section 709 for partnerships. The same first-year deduction limit ($5,000, phasing out above $50,000) applies. LLC formation costs, state filing fees, and initial legal fees for the entity structure fall here. Keep these separate from your startup costs when tracking.

I started my business this year. Can I deduct my laptop and office furniture as startup costs?

Equipment purchases like laptops and furniture are generally not startup costs — they're depreciable assets (or immediately expensable under Section 179) from the date you place them in service. You don't need the startup cost rules for these. Once the business is open, most equipment purchases are simply deducted or depreciated as regular business expenses.

What if I investigated starting a business but decided not to?

If you pay to investigate a specific business opportunity but decide not to pursue it, those costs are generally not deductible. They're considered personal capital expenditures. This is different from costs to investigate a business you actually open — those qualify as startup costs. The distinction is narrow and worth discussing with a CPA if you've had significant investigation costs.

Can I deduct training I did before opening the business?

Yes, if the training was directly related to the specific business you're opening and not general education. For example, a massage therapist who paid for certification before opening a massage practice would include that cost in startup costs. General business courses not tied to the specific business wouldn't qualify.

What date does the 180-month amortization start?

Amortization starts with the month the active business begins. If you open in July, you get 6 months of amortization in the first year (July through December). Year one's deduction includes both the $5,000 immediate allowance (or whatever portion the phase-out leaves you) and the first months of amortization on the remainder.

Tax deductions

Deducting Business Startup Costs: The $5,000 Rule and 15-Year Amortization

The IRS lets you deduct up to $5,000 in startup costs in your first year of business — but only if total costs stay under $50,000. Above that, startup costs must be amortized over 180 months. Here's what qualifies and how to maximize the deduction.

Written by Matt Reese, CPA · 5 min read · Published April 2026·Share on LinkedIn

Key Takeaways

Startup costs are costs paid to investigate or create a business before you open — legal fees, market research, licenses, training, and initial advertising.
The first $5,000 is deductible in year one. If total startup costs exceed $50,000, the $5,000 allowance phases out dollar-for-dollar. At $55,000 in costs, you get $0 in the first-year deduction.
Remaining startup costs are amortized over 180 months (15 years) starting with the month the business opens.
Some costs that feel like startup expenses are actually currently deductible as regular business expenses once the business is open — these don't need to go through the startup cost rules.

What qualifies as a startup cost

The IRS defines startup costs under Section 195 as amounts paid to investigate or create a businessbefore the business begins active operations. They must be costs that would be currently deductible once the business is open — you’re just paying them before the business technically starts.

Common startup costs:

Market research, surveys, and feasibility studies to evaluate the business opportunity
Business planning and consulting fees
Initial advertising and marketing before opening
Employee training before the business opens
Licenses, permits, and professional fees required to open
Travel to investigate potential locations or meet with suppliers
Initial inventory evaluation costs (not the inventory itself)

What doesn’t qualify: Equipment and assets (those go through depreciation rules), inventory, and costs for acquiring an existing business (those are capitalized differently).

Startup costs are the costs of getting ready to open — not the costs of being open. Once the business is operating, regular expenses are deductible under normal rules.

The $5,000 first-year deduction

In the first year the business is active, you can deduct up to $5,000 in startup costs immediately. The remaining costs are amortized over 180 months (15 years).

But there’s a catch: the $5,000 allowance phases out dollar-for-dollar when total startup costs exceed $50,000. This means:

$45,000 in startup costs → $5,000 immediate deduction, $40,000 amortized over 15 years
$52,000 in startup costs → $3,000 immediate deduction ($5,000 minus $2,000 excess above $50k), $49,000 amortized
$55,000 in startup costs → $0 immediate deduction, full $55,000 amortized over 180 months
$100,000 in startup costs → $0 immediate deduction, full $100,000 amortized over 180 months

The phase-out is steep

For most new small businesses, keeping startup costs below $50,000 preserves the full $5,000 immediate deduction. Once you cross that threshold, you lose $1 of immediate deduction for every $1 over $50,000 — and it disappears entirely at $55,000. If you’re approaching that threshold, discuss with your CPA whether any costs can be classified differently (as regular business expenses once the business opens) to stay under the limit.

Total startup costs	First-year deduction	Amortized over 180 months	Monthly amortization deduction
$10,000	$5,000	$5,000	$27.78/month
$25,000	$5,000	$20,000	$111.11/month
$45,000	$5,000	$40,000	$222.22/month
$52,000	$3,000 ($5k minus $2k phase-out)	$49,000	$272.22/month
$55,000	$0 (fully phased out)	$55,000	$305.56/month
$100,000	$0 (fully phased out)	$100,000	$555.56/month

Organizational costs: the parallel rule

If you formed an LLC or corporation for your business, the costs of creating the legal entity are called organizational costs — and they follow the same rules but under separate code sections (Section 248 for corporations, Section 709 for partnerships/LLCs).

Organizational costs include: state filing fees, attorney fees for drafting the operating agreement or bylaws, and organizational meetings. The same $5,000 immediate deduction with phase-out above $50,000, and 180-month amortization for the remainder.

Track organizational costs and startup costs separately — they’re different line items on the tax return even though the rules are parallel.

Costs that don’t need the startup cost rules

Not everything you pay before opening counts as a startup cost. Some expenses are simply deductible as regular business expenses once you’re open — and for these, the startup cost rules don’t apply:

Prepaid rent for your first business location — generally deductible in the period it covers
Equipment and computers — depreciable assets (potentially expensed under Section 179)
Office furniture — same as equipment
Professional fees once the business is open — CPA, attorney fees for ongoing business become regular deductions
Website development costs — may be immediately deductible or amortized depending on nature

New consulting business — classifying $35,000 in year-one costs

LLC formation + operating agreement (attorney fees)$3,500 → Organizational costs

Market research and business plan development$4,000 → Startup costs

Initial website design and launch$5,000 → May be regular business expense

Training and certification before opening$6,000 → Startup costs

First month's office rent (paid before opening)$2,500 → Prepaid expense, deductible when used

Laptop and equipment$4,000 → Depreciable asset (Section 179 eligible)

Initial marketing and advertising$3,000 → Startup costs

Total startup costs (qualifying only)$13,000

First-year startup cost deduction ($5k, then amortize $8k)$5,000 + $267/month

Only about $13,000 of this owner's expenses qualify as startup costs. Equipment is expensed under Section 179, rent and ongoing expenses flow through as regular deductions, and website costs are handled separately. Correctly classifying each cost produces a better outcome than lumping everything into 'startup costs.'

What happens if you never open the business

If you paid startup costs to investigate a business you ultimately decided not to open, the costs are generally not deductible at all — they become non-deductible personal capital expenditures. The startup cost rules only apply to businesses that actually commence operations.

If the business opens and then you close it, you can deduct any unamortized startup costs in the year the business is permanently abandoned.

Make the election on the return

To use the $5,000 immediate deduction and 180-month amortization, you make an election on your tax return (typically on Form 4562 or directly on Schedule C). The election is automatic if you don’t otherwise capitalize the costs — your CPA handles this as part of the first-year return. Just make sure you’ve documented and provided the startup cost amounts.

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Frequently asked

Questions owners actually ask

Do startup costs include the cost of forming my LLC or corporation?: Organizational costs (forming the entity) are treated separately from startup costs under a parallel set of rules — Section 248 for corporations and Section 709 for partnerships. The same first-year deduction limit ($5,000, phasing out above $50,000) applies. LLC formation costs, state filing fees, and initial legal fees for the entity structure fall here. Keep these separate from your startup costs when tracking.
I started my business this year. Can I deduct my laptop and office furniture as startup costs?: Equipment purchases like laptops and furniture are generally not startup costs — they're depreciable assets (or immediately expensable under Section 179) from the date you place them in service. You don't need the startup cost rules for these. Once the business is open, most equipment purchases are simply deducted or depreciated as regular business expenses.
What if I investigated starting a business but decided not to?: If you pay to investigate a specific business opportunity but decide not to pursue it, those costs are generally not deductible. They're considered personal capital expenditures. This is different from costs to investigate a business you actually open — those qualify as startup costs. The distinction is narrow and worth discussing with a CPA if you've had significant investigation costs.
Can I deduct training I did before opening the business?: Yes, if the training was directly related to the specific business you're opening and not general education. For example, a massage therapist who paid for certification before opening a massage practice would include that cost in startup costs. General business courses not tied to the specific business wouldn't qualify.
What date does the 180-month amortization start?: Amortization starts with the month the active business begins. If you open in July, you get 6 months of amortization in the first year (July through December). Year one's deduction includes both the $5,000 immediate allowance (or whatever portion the phase-out leaves you) and the first months of amortization on the remainder.

Take the next step

Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.

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Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.