If you started a business in 2019, the IRS will allow you to deduct up to $5000 of your start-up costs when you file your first tax return. Generally speaking, start-up costs are those expenses incurred while investigating, creating, or engaging in for-profit activities BEFORE your active trade or business begins. In order to deduct start-up costs, the costs must be allowable for an active trade or business that was engaged in for-profit activity in the same field. In other words, you can’t deduct your adoption expenses as start-up costs.
The $5,000 start-up cost deduction is phased out if your start-up expenses exceed $50,000. In that case, the deduction is reduced for every start-up dollar exceeding $50,000. For example, if your start-up expenses were $51,000 in 2019, you can only deduct $4,000 in start up expenses under this rule.
But what happens to the remaining start-up costs ($47,000 in our example). You can still deduct those costs, but they must be amortized (spread out) over 15 years. The 15 years begin in the month that your active trade or business activity begins.
If you elect to deduct startup costs during your first year, you simply list those costs as “other expenses” on Schedule C. Any amount over the cap is then listed on form 4562 (Depreciation and Amortization) and amortized over 15 years. However, many start-up businesses do not see a profit for months, or even years after opening the door. In that case, it may be beneficial to forego the $5,000 start-up cost deduction. The taxpayer makes this election by including all start up expenditures on form 4562.
It is important not to confuse amortization of start-up costs with depreciation of capital assets. Capital assets are generally not considered start-up costs, and must be depreciated according to their asset class rather than amortized.
The decision as to whether or not to take the $5000 deduction is an important one that could cost the small business owner who does not make the appropriate election. You should seek the professional advice of a tax professional who is familiar with these complicated rules BEFORE making a decision. The election either to amortize, or to capitalize start-up expenditures is irrevocable and applies to all start-up expenditures that are related to the active trade or business.
The author, Bryan Corcoran, Esq, is a retired Marine Judge Advocate. He earned his J.D. and Masters in Taxation from the University of Akron in 1997. He is currently a Tax Analysts for Heritage Income Tax. The views expressed in this paper are his own, and are not intended as a substitute for professional tax planning or legal advice.
I.R.S Pub 535, page 29
See 26 CFR Sections 1.195-1, 1.248-1, and 1.709-1.
26 CFR Section 1.195-1(b)