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Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses. 

Note. Organizational costs usually only pertain to a corporation or partnership.

You can elect to deduct up to $5,000 of business start-up paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up costs exceed $50,000. Any remaining costs must be amortized.

Starting a Business

For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. The costs that are not deducted currently can be amortized ratably over a 180-month period. The amortization period starts with the month you begin operating your active trade or business. You are not required to attach a statement to make this election. Once made, the election is irrevocable. 

Amortization

Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. It is similar to the straight line method of depreciation.

How to Amortize

Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier under Business Start-Up Costs). You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both aren't less than the applicable amortization period. Once you choose an amortization period, you can't change it. 

To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month. 

How to Deduct Amortization

To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return.

Please see IRS Publication 535 Business Expenses for additional information about which start-up and organizational costs are qualified. Also, there may be different rules depending on when the expenses were paid.  Additional information can also be found in Section 195 of the Internal Revenue Tax Code.

Partnership (Form 1065):

  1. Click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Business Deductions under Select Topics Myself 
  3. Click Continue and No to reach the screen titled Depreciation and Amortization, then click Depreciation
  4. Click No to reach the screen titled Business Deductions - Amortization, then click Yes. If you have already made amortization entries, then you will be brought to the screen titled Business Income - Amortization Review where you can click +Add Form 4562 Amortization or Review, whichever is applicable in your situation.
  5. Enter a description, the date amortization begins, the TOTAL costs, and the number of years. You will also need to enter the Code Section Number from the Form 4562 instructions. Then click Continue.
  6. On the following screen is where you will enter the prior amortization.
  7. Click Continue to reach the summary screen where you current year amortization amount and start-up and/or organizational expenses will be outlined.

S-Corporation (Form 1120S):

  1. Click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Business Deductions under Select Topics Myself 
  3. Click Continue and No to reach the screen titled Depreciation and Amortization, then click Depreciation
  4. Click No to reach the screen titled Business Deductions - Amortization, then click Yes. If you have already made amortization entries, then you will be brought to the screen titled Business Income - Amortization Review where you can click +Add Form 4562 Amortization or Review, whichever is applicable in your situation.
  5. Enter a description, the date amortization begins, the TOTAL costs, and the number of years. You will also need to enter the Code Section Number from the Form 4562 instructions. Then click Continue.
  6. On the following screen is where you will enter the prior amortization.
  7. Click Continue to reach the summary screen where you current year amortization amount and start-up and/or organizational expenses will be outlined.

C-Corporation (Form 1120):

  1. Click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Business Deductions to expand the category and then click Ordinary Deductions
  3. Click Continue and No to reach the screen titled Federal Q&A - Depreciation and Amortization, then click Depreciation
  4. Click No to reach the screen titled Amortization, then click Yes. If you have already made amortization entries, then you will be brought to the screen titled Business Income - Amortization Review where you can click +Add Form 4562 Amortization or Review, whichever is applicable in your situation.
  5. Enter a description, the date amortization begins, the TOTAL costs, and the number of years. You will also need to enter the Code Section Number from the Form 4562 instructions. Then click Continue.
  6. On the following screen is where you will enter the prior Amortization
  7. Click Continue twice to reach the summary screen where you current year amortization amount and start-up and/or organizational expenses will be outlined.

The current year expense and amortization amount will appear on Form 4562, Line 42. When you print the return, you will see two attached supporting worksheets. The first, titled Supporting Details for Other Business Deductions, will show the total current year expense and amortization amount. The second, titled Amortization Expenditure Summary, will give a break-down of the total costs and how much was elected to be expensed in the current year.


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