Startup and organizational costs are amounts that are paid to create an active trade or business or to investigate the creation or acquisition of an active trade or business. Some examples of startup costs are advertisements for the opening of a business, salaries and wages paid for employees who are being trained in preparation for the opening, fees for consultants or other professionals to prepare for opening a business.
Organizational costs are amounts paid to organize and create a corporation or partnership. Examples would include state incorporation fees, the cost of legal services and costs of organizational meetings of directors and stockholders.
Interest, taxes and research and development expenses are not included in startup and organizational costs.
You can deduct up to $5,000 of startup and organizational costs in the first year of the business, except that the $5,000 of cost is reduced dollar for dollar by any amount that total startup and organizational exceed $50,000. All startup and organizational costs that are not deducted in the first year are amortized in equal amounts over 15 years.
For example, if your business had $52,000 of startup and organizational cost. In the first year you would deduct $3,000 ($5,000 minus $2,000 which is the amount of costs in excess of $50,000) The remaining balance of $49,000 ($52,000 total minus the $3,000 first year deduction) would be written off in equal amounts of $3,667 each year for the next 15 years.