When starting a business, owners should treat all eligible costs incurred before beginning to operate the business as capital expenditures that are part of their basis in the business. Generally, the business can recover costs for assets through depreciation deductions.
Going Into Business
The costs of getting started in business, before you actually begin business operations, are capital expenses. These costs may include expenses for advertising, travel, or wages for training employees.
If you go into business.
When you go into business, treat all costs you had to get your business started as capital expenses.
Usually, you recover costs for a particular asset through depreciation. Generally, you cannot recover other costs until you sell the business or otherwise go out of business. However, you can choose to amortize certain costs for setting up your business. See Starting a Business in chapter 8 for more information on business start-up costs.
Business start-up costs
Start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and to produce income in anticipation of the activity becoming an active trade or business.
Qualifying costs
A start-up cost is recoverable if it meets both of the following requirements:
It’s a cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.
It’s a cost a business pays or incurs before the day their active trade or business begins.
Start-up costs include amounts paid for the following:
An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
Advertisements for the opening of the business.
Salaries and wages for employees who are being trained and their instructors.
Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
Salaries and fees for executives and consultants, or for similar professional services.
Nonqualifying costs Start-up costs don't include deductible interest, taxes, or research and experimental costs.
Research and Experimental Costs
You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below).
If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from the costs.For a definition of "research and experimental costs" and information on deducting them as current business expenses, see chapter 7.
Optional write-off method. Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs.
Disposition of business.
If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business.
For more info: IRS.gov
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