Organizational Costs for New Entities: IRC 248 and 709

Legal fees to draft a corporate charter or a partnership agreement, the accounting work to set up the entity, and state filing fees aren’t startup costs. They’re organizational costs, and they get their own deduction: IRC 248 for corporations and IRC 709 for partnerships. Each works like the IRC 195 startup cost deduction: up to $5,000 in the year the entity begins business, reduced dollar for dollar once the costs pass $50,000, with the rest deducted over 180 months. Because the two allowances are separate, a new corporation or partnership can deduct up to $10,000 in year one. Costs of issuing or selling stock, or a partnership’s syndication costs of marketing its interests, don’t qualify for either.

How do startup cost deductions work for a new business?

Should a new restaurant use Section 179 or bonus?

In a first year with little income, bonus is often the easier fit for the kitchen equipment and build-out. Section 179 can’t exceed your taxable income from active businesses, wages included, so a restaurant that opens in September may not be able to use all of it yet. Bonus has no income cap of its own and applies by default to property acquired after January 19, 2025.

Unused Section 179 carries forward to later years. The leasehold build-out can count as qualified improvement property if it’s an interior improvement to a nonresidential building made after the building was first placed in service, and QIP qualifies for bonus or, by election, Section 179. Neither method touches the startup and organizational costs themselves, which follow the IRC 195 and 709 rules above. If bonus creates a loss, the excess business loss rule caps what an individual can use for 2025 at $313,000 ($626,000 joint).

How much of your startup costs can you deduct in the first year?

Under IRC 195, you can deduct up to $5,000 of startup costs in the year your business begins operations, with the $5,000 reduced dollar-for-dollar for total startup costs exceeding $50,000. Remaining startup costs above the first-year deduction are amortized over 180 months (15 years) beginning in the month the business opens. Startup costs include market research, advertising before opening, employee training, travel to scout locations, and consultant fees for setting up the business. Organizational costs for forming a corporation or partnership get their own separate $5,000 first-year deduction with the same $50,000 phase-out and 180-month amortization, so you can potentially deduct up to $10,000 in total organizational and startup costs in year one.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.