Startup and Organizational Costs | Hurdlr (2024)

Joe wants has always wanted to start his own food truck business, Sloppy Joes. Before opening for business, he spent $6,000 on a market study to determine what city would be best for him to operate in. Since his expenditure is a qualifying startup cost incurred prior to opening, he would be able to deduct $5,000 of this expense on line 27a of his Schedule C in the year he opens his business, however, the remaining $1,000 along with any other startup costs he incurred would need to be amortized over 180 months on Form 4562.

Mark is a CPA with 25 years of experience. In the first quarter of last year, Mark was in the startup phase of launching his own accounting practice. During this time, he spent $5,000 on travel to meet with potential clients and $3,000 on advertising collateral. In April of last year, he opened his doors for business. When Mark prepares his first year Schedule C he would deduct $5,000 of his startup costs and amortize $150 (($3,000 /180 months) X 9 months) of his startup costs on his Schedule C. The remaining $2,850 ($3,000 - $150) of startup costs would stay on his balance sheet and be amortized for another 171 (180 months - 9 months) months.

In November of last year, Jane started her own graphic design firm. She opened her doors for business in February of this year. Prior to opening, last year, Jane spent $2,500 on a computer. Even though this expenditure was incurred before she started her business activities, since her computer would be considered a capital asset, it would not be classified as a startup expense. Accordingly, Jane would depreciate it using the normal treatment as if the asset had been purchased after she commenced operations.

Kim is an Entrepreneur and founder of a new technology business. During the year Kim raised $1,000,000 from four investors to start her business, she then spent $52,000 on legal, accounting and incorporation fees to form a Delaware C corp. When Kim prepares the tax return for the first year her corporation is actively open for business, she would be able to deduct $3,000 of organizational costs ($5,000 - ($52,000 - $50,000)) but would have to amortize the remaining $49,000, a portion of which could also be deductible in the first year she starts her business operations.

Henry recently organized a new cleaning business as a single member LLC. He paid his state a $350 filing fee and an attorney $900 to draft an operating agreement for his new business. Since Henry can deduct up to $5,000 of organizational costs, the first year his business is actively operating he can deduct the full $1,250 of organizational costs on line 27a of his Schedule C. Note that henry could also deduct up to $5,000 of start up costs, to the extent he has any, in the first year his business is active.