Amortizing Your Startup Expenses

April 13, 2006

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If you incur startup expenses, the IRS requires you to amortize and deduct the expenses over a period of at least 60 months, provided that you subsequently enter the trade or business to which the expenses relate. Expenses incurred after the business begins operation, however, are often deductible in the first year. Thus, it's often a good idea to postpone some expenses until after your first customer arrives.

Which expenses must be amortized? The amortization only applies to expenses incurred after you decide to establish a particular business and before the business actually begins operation. It applies to expenses such as advertising; salaries and wages paid to employees who are being trained; travel expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees paid or incurred for executives, consultants, or similar professional services.

It does not, however, apply to expenses that would not be deductible if incurred after you start the business.

If you incurred expenses in connection with the sale of an interest in your partnership, you would not be able to amortize the expenses because they are not deductible after the start of a business.

Don't forget that you must actually enter the trade or business in order to be eligible for the amortization. Thus, if you incur expenses in exploring a business opportunity and later decide not to pursue the opportunity, you cannot amortize those expenses.

You can find out more about this subject in our discussion of business startup expenditures.