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How do I deduct amortize startup costs on my taxes?

TL;DR

Startup costs can generally be deducted, but they must be amortized over 15 years unless you elect to deduct up to $5,000 in the first year, subject to limitations.

Detailed Answer

Startup costs are deductible if they are incurred before the business begins operations and are directly related to creating an active trade or business. These costs include expenses like market research, advertising, employee training, and professional fees. You can elect to deduct up to $5,000 of startup costs in the first year, but this is reduced dollar-for-dollar by the amount your total startup costs exceed $50,000. Any remaining startup costs must be amortized over 180 months (15 years) starting from the month your business begins operations. If your startup costs exceed $55,000, you must amortize the entire amount over 15 years.

Where to Put It on the Tax Form

Form 4562, Part VI for amortization; Schedule C, Line 27a for the initial deduction.

Real World Example

A freelance graphic designer spends $4,000 on market research and $3,000 on legal fees before starting their business. They can deduct $5,000 in the first year and must amortize the remaining $2,000 over 15 years, resulting in an additional $133.33 deduction each year.

Calculation Required

A calculation is required for this deduction.

Calculate the total startup costs. Deduct up to $5,000 in the first year if total costs are $50,000 or less. Amortize any remaining costs over 180 months. For example, if total costs are $7,000, deduct $5,000 in the first year and amortize $2,000 over 15 years ($2,000/180 months = $11.11 per month).

Audit Risk & Documentation Tips

Moderate audit risk. Keep detailed records of all startup expenses, including receipts, invoices, and contracts. Document the date your business officially started operations, as this determines when amortization begins. Maintain a clear distinction between startup costs and regular business expenses.

IRS Reference

IRS Publication 535, IRC §195

Relevant Industries

FreelancersConsultantsSmall Business OwnersStartups

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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.

Page created on July 25, 2025

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