Business Start-Up Costs: The $5,000 Deduction, the $50,000 Phase-Out and 180-Month Amortization
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How we wrote this: A summary of IRS Publication 583 (Starting a Business and Keeping Records), the "Startup and organizational costs" section of the Instructions for Form 4562, and the IRS page that replaced Publication 535 (all linked below), checked October 29, 2026. The worked example is our own arithmetic. This is general information, not tax advice.
Before a business makes its first sale, it usually spends money: research, ads announcing the opening, travel to line up suppliers, training. The IRS has a specific rule for these start-up costs, and it differs from how ordinary operating expenses work.
What counts as a start-up cost
Publication 583 defines business start-up costs as expenses you incur before you actually begin business operations. They depend on the type of business, and the IRS gives examples such as advertising, travel, surveys and training.
Two related categories are handled separately:
- Organizational costs. The Form 4562 instructions cover organizational costs for a corporation (Internal Revenue Code section 248) and a partnership (section 709), such as the costs of setting up the entity.
- Assets. Publication 583 says you usually recover the cost of a particular asset, such as machinery or office equipment, through depreciation, not as a start-up cost. Our Section 179 and bonus depreciation guide covers equipment.
Publication 583 notes that start-up costs are generally capital expenses, which is why a special rule is needed to deduct any of them right away.
The rule: deduct up to $5,000, amortize the rest
From Publication 583:
- You can elect to deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs.
- Each $5,000 deduction is reduced by the amount your start-up (or organizational) costs exceed $50,000.
- Any remaining costs must be amortized.
The Form 4562 instructions fill in the details for costs paid or incurred after September 8, 2008:
- The deduction is taken for the year your business begins.
- You don't need to attach a statement to make the election, and once made, it's irrevocable.
- Costs not deducted currently are amortized ratably over 180 months (15 years), starting with the month you begin business operations.
- Amortization is reported in Part VI (Amortization) of Form 4562.
The instructions also say that if you timely filed your return without making the election, you can still make it on an amended return filed within 6 months of the due date (excluding extensions); see the instructions for the exact conditions.
How the phase-out works
Because the $5,000 is reduced dollar for dollar above $50,000, it disappears entirely once start-up costs reach $55,000. Then everything is amortized.
| Start-up costs | Deducted in year one | Amortized over 180 months |
|---|---|---|
| $4,000 | $4,000 | $0 |
| $20,000 | $5,000 | $15,000 |
| $53,000 | $2,000 | $51,000 |
| $60,000 | $0 | $60,000 |
A worked example
Say a sole proprietor spends $20,000 on market research, an opening ad campaign and training before opening in July.
- Year-one deduction: $5,000 (costs are under $50,000, so no reduction).
- Amortizable amount: $20,000 − $5,000 = $15,000.
- Monthly amortization: $15,000 ÷ 180 = about $83.33 per month.
- First year: the business began in July, so the first year covers July through December, 6 months: 6 × $83.33 ≈ $500.
- Year-one total: $5,000 + about $500 = about $5,500. Each later full year: about $1,000, until the 180 months run out.
Organizational costs for a corporation or partnership follow the same pattern on their own separate $5,000/$50,000 track.
When start-up becomes operating
Once the business is actually operating, ordinary and necessary expenses are generally deducted as regular business expenses, as Publication 334 describes for Schedule C filers. Pinning down the month operations began matters, because it sets both the year of the deduction and the start of amortization. Keep records showing when you opened for business.
Where to find the old Publication 535 material
The IRS has discontinued Publication 535, Business Expenses; its last revision was for 2022. The IRS "Guide to business expense resources" page maps each old chapter to current publications and forms; its Amortization row points to Form 4562 and Publication 946. Publication 583 now carries the start-up cost summary quoted above.
Quick checklist
- List costs incurred before opening, separately from equipment and other assets.
- Separate organizational costs if you formed a corporation or partnership.
- Note the month operations began.
- Deduct up to $5,000 (less any excess over $50,000); amortize the rest over 180 months on Form 4562, Part VI.
- Keep receipts and records with your business files.