Deducting Startup Costs for a New Side Business
Money spent before a side business opens is a startup cost, and the IRS lets you deduct up to $5,000 of it in the first year and recover the rest over 180 months. These costs are treated differently from ordinary expenses because no business existed yet when you paid them. The figures below are the IRS rules as of October 2026.
1. What counts as a startup cost
The IRS defines startup costs as amounts paid or incurred to create an active trade or business, or to investigate creating or acquiring one. To be recoverable, a cost must meet both of these tests:
- It is a cost you could deduct if you paid it to run an existing business in the same field.
- You paid or incurred it before the day your active business began.
The IRS lists examples, including:
- An analysis or survey of potential markets, products, labor supply, or transportation.
- Advertisements for the opening of the business.
- Salaries and wages for employees being trained, and their instructors.
- Travel and other necessary costs to secure distributors, suppliers, or customers.
- Salaries and fees for consultants or similar professional services.
Publication 583 adds that startup costs depend on the type of business and may include advertising, travel, surveys, and training.
1.1. What does not count
The IRS says startup costs do not include deductible interest, taxes, or research and experimental costs. Those follow their own rules.
Equipment is also different. Publication 583 explains that you usually recover the cost of a particular asset, such as machinery or office equipment, through depreciation rather than as a startup cost. A camera or laptop bought before launch is an asset to depreciate, not a startup expense.
2. The rule: $5,000 now, the rest over 180 months
Startup costs are generally capital expenses, but the IRS gives you an election:
- Deduct up to $5,000 of startup costs in the year the business begins.
- That $5,000 is reduced by the amount your total startup costs exceed $50,000.
- Amortize the rest over a 180-month period that starts with the month your active business begins.
Publication 583 notes a separate, parallel limit for organizational costs, also up to $5,000 with the same $50,000 phase-down, which matters if you form a corporation or partnership.
3. Worked example: a small launch
Assume these facts, chosen for illustration:
- Before opening, you spend $7,200 on market research, launch ads, and a consultant.
- Your business opens in April 2026, so it operates 9 months of the year.
| Step | Amount |
|---|---|
| First-year deduction | $5,000 |
| Remaining startup costs | $2,200 |
| Monthly amortization ($2,200 / 180) | about $12.22 |
| Amortization for April to December (9 months) | about $110 |
| Total 2026 deduction | about $5,110 |
From 2027 on, you deduct about $146.67 a year ($12.22 x 12) until the full $7,200 has been recovered.
If your pre-launch costs total $5,000 or less, the whole amount can be deducted in the year the business begins.
4. Worked example: a bigger launch
Now suppose pre-launch costs were $52,000. They exceed $50,000 by $2,000, so the first-year deduction drops from $5,000 to $3,000. The remaining $49,000 is amortized at about $272.22 a month over 180 months.
At $55,000 or more, the first-year deduction is reduced to zero, and everything is amortized.
5. When the clock starts matters
Two dates drive everything: the date each cost was paid, and the date your active business began. Costs paid before launch are startup costs. Costs paid after the business is up and running are ordinary business expenses, deducted under the usual rules.
So write down the date your active business began, and keep pre-launch receipts in their own folder.
6. What if the business never opens?
The IRS draws a line for people who investigate buying a business. Recoverable startup costs for purchasing an active business include only investigative costs incurred during a general search or preliminary investigation, the costs that help you decide whether to buy. Costs to purchase a specific business are capital expenses that cannot be amortized.
If you are in that situation, or your launch is abandoned partway, the right treatment depends on the facts, and it is worth checking with a tax professional.
7. How to claim it
Publication 583 points to the Instructions for Form 4562, Depreciation and Amortization, for amortizing startup and organizational costs. In practice:
- Total your startup costs and confirm each was paid before your business began.
- Take the first-year deduction, up to $5,000 reduced by any excess over $50,000.
- Amortize the remainder over 180 months starting with your opening month, using Form 4562 in the first year.
- Keep receipts and a short note of the opening date with your records.
8. Key takeaways
- Startup costs are expenses paid before your business begins that would be deductible if the business were already running.
- You can elect to deduct up to $5,000 in the first year, reduced dollar for dollar by costs above $50,000.
- Remaining startup costs are amortized over 180 months, starting with the month the business begins.
- Equipment is depreciated, and interest, taxes, and research costs are not startup costs.
- In the example, $7,200 of pre-launch costs for an April opening produces a first-year deduction of about $5,110.