Tax Deduction of Business Start Up Costs

When an individual starts a business he or she will generally incur certain costs in starting up the business that are not actually costs of running the business. These would include consultant fees to help plan the business or advertising costs or wages incurred before the business opens.

Since these costs are not an expense of running a business, they cannot be currently deducted on the tax return of the business. Instead they are required to be capitalized and written off on the tax return over 180 months or 15 years. There is an exception that allows the taxpayer to take a current tax deduction for the first $5,000.00 of start up expenses, which for many small businesses would cover the entire expenditures. Any start up costs in excess of $5,000.00 would still have to be written off over 180 months.

As any bankruptcy lawyer can tell you though, many new ventures do not stay in business for 15 years, and an entrepreneur, who discontinues operations before the amortization period is complete will want to know what happens to the costs that he has not deducted before he closes. Fortunately, the tax law allows these remaining costs to be deducted as a loss in the year the business is disposed of.