Costs of starting a business can be separated into two time periods: costs for investigating and costs of start-up. You can deduct both types of costs, with certain restrictions imposed by the IRS.
The IRS says that start-up costs are "amount paid or incurred for (a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business."
How Much Can I Deduct, How Do I Make the Deduction, and When Can I Deduct It?
Business start-up costs are typically considered capital expenditures. That is, they are part of your investment in the business assets, and investment costs are amortized (spread out) over several years.
Choices in Deducting or Amortizing Start-up Costs
You may deduct up to $5,000 in start-up costs in your first year in business. This deduction is restricted if you have over $50,000 in start-up costs. If you have additional start-up costs over the $5,000, you can amortize these costs over 15 years. If you are not going to be profitable in your first year, you may want to consider another option to minimize your taxes in years where you make more profit.
Instead of deducting $5,000 in your first year, you may amortize all start-up costs over 15 years, taking the same deduction each year. For example, if your start-up costs are $45,000, you could deduct $3,000 a year for 15 years.
You can also wait to recover your start-up costs until you sell your business or close the business, but most business owners don't want to wait that long to get the tax benefit from these start-up costs.
In addition to the $5,000 start-up deduction, you can take up to $5,000 in additional deduction for small business organizational expenses. This deduction is for the expense of forming a corporation, partnership, or limited liability company (not a sole proprietorship). The deduction would be applied to legal fees and other expenses for forming your business structure.
What If I Don't Go Into Business? Can I Still Deduct These Expenses?
If you are investigating a specific business to start or buy, and the deal doesn't work, you can deduct your personal expenses on Schedule A of your Form 1040 as "miscellaneous expenses."
If you are searching for a business but have no specific business in mind, and you decide not to buy any business, you cannot deduct these expenses; they are not related to any specific business.