Deducting Business Start-up Costs

Business start-up costs are amounts incurred for: (a) creating an active business and (b) investigating the creation or acquisition of a business. A start-up cost is amortizable if it meets the following tests:

1. The cost was incurred to operate an existing business in the same field as the one you entered into, and
2. The cost was incurred before the day your active business begins.

The following are start-up costs:

• Analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertising costs for the opening of the business.
• Salaries and wages for employees who are in training as well as their instructors.
• Travel and other costs necessary to secure prospective distributors, supplies or customers.
• Salaries and fees for executives and for professional services.

Start-up costs do not include research and experimental costs, deductible interest or taxes.

Purchasing an existing business

Costs incurred in the course of a general search for a business or a preliminary investigation of a specific business are amortizable as start-up costs. These are the costs associated with the decision to acquire the business. Costs incurred in an attempt to purchase the business are capital expenses that cannot be amortized.

Here’s an example:

On April 16th, you hired me to assist you in the potential purchase of a coffee shop. I researched the industry, the local economy and the financial projections of a specific coffee shop. On July 1st, you prepared and submitted a letter of intent to the coffee shop owner. The letter stated that a binding commitment would result only after a purchase agreement was signed. I continued to perform professional services related to the research the business by analyzing the financial records of that coffee shop. On August 1st, you signed the purchase agreement with the owner of the coffee shop.

The costs of services provided by me before August 1st are amortizable as start-up costs while the costs of services provided by me on and after August 1st relate to the attempt to purchase the business and therefore must be capitalized.