One tax write-off a lot of small business owners miss out on is the start-up and organizational costs deduction. Yes, you can deduct some of the costs behind getting your organization set up, which should be good news for small business owners. Here’s everything you need to know to take full advantage of this write-off. 

Which start-up costs are deductible? 

The IRS divides start-up costs into two categories. The first is known as business start-up costs, and includes the cost of things like: 

• Market and product research

• Customer surveys

• Consulting

• Advertising

• Wages and salaries for employee training

• Acquiring an existing business

• Site selection

• Leasing a property for your business

• Leasing or purchasing equipment

The other category is known as organizational costs. This includes any expenses that relate to forming a corporation, partnership, or LLC, such as: 

• Incorporation fees

• Partnership filing fees

• Legal fees

• Accounting fees

• Temporary director salaries

• Organizational meetings costs

How much can I deduct for start-up costs? 

If your total start-up or organizational costs are less than $50,000, you can deduct $5000 in the year you open for business. Beyond $50,000, it gets a little more complicated. For every dollar you spend above $50,000, your first year deduction goes down by $1. 

So, for example, if your total start-up costs are $52,000, you can only deduct $3000 ($5000 minus $2000) in that first year. After the first year, you can amortize the leftover expenses. (We’ll explain how amortization works in a minute). 

However, if your start-up or organizational costs total more than $55,000, you won’t be able to deduct anything in year one. Instead, you’ll amortize all those expenses. 

What’s amortization? 

If you have remaining expenses after deducting some in that first year, you can usually write these off over the next 15 years, in what’s called amortization. Let’s say, for example, that you spent $52,000 in start-up or organizational costs, and deducted $3000 the first year. You now have $49,000 left. You’d divide that by 180 (the number of months in 15 years), and deduct $272 per month—provided your company stays in business for the next 15 years. 

Which forms do I use? 

You can use Part V in Schedule C of Form 1040 to claim the $5000 deduction. To amortize, you’ll need to use Form 4562, Depreciation and Amortization, and add this to your tax return the first year your company is open for business. Once you’ve used the form to calculate amortization, put that expense on Form 4562 (same place as the $5000 deduction).