Startup Costs Deduction: What New Businesses Can Deduct Under IRC 195

By Yarik Yarosh, CPA ·September 5, 2026 ·3 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Costs incurred before a business begins operations are not regular business expenses (because the business does not yet exist). Instead, they’re “startup costs” under IRC 195, with a specific deduction and amortization rule. The first $5,000 is immediately deductible, and the remainder is amortized over 180 months (15 years). Separately, the first $5,000 in organizational costs (LLC formation, partnership agreements) is also immediately deductible.

✓Key takeaway

Startup costs (IRC 195):

Costs that would have been deductible as business expenses if the business were already operating
Examples: market research, advertising to launch, employee training, travel to identify suppliers or customers, consulting fees for business planning
First $5,000 deductible in the year the business begins operations (reduced dollar-for-dollar for startup costs exceeding $50,000; fully phased out at $55,000)
Remainder amortized over 180 months starting in the month the business opens

Organizational costs (IRC 248 for corporations, IRC 709 for partnerships):

Costs of creating the legal entity: state filing fees, legal fees for operating agreement or bylaws, initial registered agent fee
Separate $5,000 immediate deduction (same phase-out at $50,000)
Remainder amortized over 180 months

NOT startup or organizational costs (different treatment):

Equipment purchases: Section 179 or depreciation (not startup costs)
Leasehold improvements: Qualified Improvement Property (15-year life, bonus depreciation)
Inventory: COGS when sold
Pre-opening rent and utilities: startup costs (amortized)
Interest on loans obtained before operations begin: startup costs or capitalized interest, depending on the asset

When does the business “begin operations”?

Hypothetical example

Round numbers. A consultant spends 4 months preparing to launch:

Month 1-4 (pre-launch):

Market research and competitive analysis: $2,000
Business plan consulting: $3,000
Website design and development: $4,000
Logo and branding: $2,500
Networking events and travel: $1,500
Pre-launch advertising: $2,000
Total startup costs: $15,000

Month 5: First client engagement (business begins)

Tax treatment of the $15,000:

Immediate deduction: $5,000
Amortization: $10,000 / 180 months = $55.56/month
Months of amortization in Year 1 (months 5-12): 8 months x $55.56 = $444
Year 1 total deduction: $5,000 + $444 = $5,444
Annual amortization in subsequent years: $55.56 x 12 = $667

Comparison: if the same $15,000 were spent AFTER the business began:

$15,000 deductible in full as ordinary business expenses
Year 1 deduction: $15,000 (instead of $5,444)

This demonstrates why the timing matters: expenses incurred after the business begins operations are immediately deductible, while pre-opening expenses are limited to the $5,000 + amortization treatment. Business owners should start operations (sign their first client, make their first sale) as early as possible to convert startup costs into ordinary business expenses.

Illustrative numbers only, not a real client and not advice for your facts.

What if the investigation does not lead to a business?

If a taxpayer investigates starting a business but decides not to proceed, the startup costs aren’t deductible at all. They’re personal expenses (the investigation of a business that never began). This makes the “begin operations” date critical: once the business begins, all costs become either startup costs (pre-opening) or ordinary expenses (post-opening). If the business never starts, neither category applies.

Related guides:

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Cite this page

Yarik Yarosh, CPA. "Startup Costs Deduction: What New Businesses Can Deduct Under IRC 195." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-startup-costs-deduction-irc195

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