Startup costs up to $5,000 now deductible

Startup costs up to $5,000 now deductible

Posted by the Asbury Park Press on 03/5/06

ONE OF THE MOST frustrating tax issues for entrepreneurs has been startup costs — they pour thousands of dollars into market research, advertising and other expenses to get their companies up and running, but have had little in the way of immediate relief from the government.

But, with a change in the Internal Revenue Code that took effect Oct.
22, 2004, companies — including many filing their first tax returns
this year — are now allowed to deduct $5,000 of their startup costs.
Any expenses above that amount must be amortized, or depreciated, over
the next 15 years — the method that applied to all startup costs in the

Startup costs include many of the expenditures a company makes before it actually starts doing business. Market research, advertising, employee recruiting, lawyers, accountants, consultants, rent, office supplies typically are part of a new concern’s startup costs.

Until 2004, the government theorized that the money paid to start a business was an investment; once a company was actually transacting business, it had operating expenses (which can also include all the above-mentioned outlays) that were fully deductible up front.

Claiming the deduction — known as a Section 195 deduction after the tax code provision that authorizes it — involves a little more paperwork than more typical business deductions entail. Companies need to file Form 4562, Depreciation and Amortization and declare that they are electing to take the deduction for startup costs. Without this form, they cannot claim the deduction. The instructions for the form explain what you need to do; you can find them on the IRS Web site,

There is a catch to the Section 195 deduction, tied to the intent of Congress that it be used by small businesses, not larger concerns. Companies start losing the $5,000 deduction when their startup costs go over $50,000; they must reduce the deduction by the amount that exceeds the $50,000 threshold. For example, a business with $51,000 in costs can deduct only $4,000, and a business with costs over $55,000 loses the deduction entirely.


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