Startup Costs (Section 195)

Startup costs are expenses incurred investigating and getting a business ready before it opens: market research, travel to scout locations, pre-opening advertising, training, consultant and legal fees. Because a business technically cannot deduct expenses before it exists, Section 195 provides the bridge: in the year the business becomes active, the owner deducts up to $5,000 of startup costs immediately (reduced dollar for dollar once total startup costs exceed $50,000) and amortizes the remainder over 180 months. A parallel rule in Section 248/709 covers organizational costs, the legal and state fees of forming the entity itself, with its own $5,000 allowance. Costs of acquiring a specific existing business are capitalized differently, and equipment purchased pre-opening is simply depreciated once placed in service. The trigger date matters: deductions begin when the business is genuinely open for customers, not when the LLC paperwork is filed.