What qualifies as a "startup cost"
Expenses you incurred before your business officially started operating. IRS Publication 535 defines these as costs for:
- Investigating the creation of a business (market research, feasibility studies)
- Preparing to open (rent, utilities, employee training before opening day)
- Advertising before opening
- Salaries and wages for training
- Travel to line up distributors, suppliers, or customers
- Professional fees (consultants, legal fees for contracts)
These would normally be capitalized (added to the business's asset base and deducted over 15 years). The §195 election lets you deduct the first $5,000 immediately.
What's separately categorized: organizational costs
For corporations and partnerships (including multi-member LLCs), you also get a separate $5,000 deduction for organizational costs:
- Legal fees for drafting the operating agreement or articles of incorporation
- State filing fees to form the entity
- Accounting fees for setup
- Meeting expenses for the initial organization
Single-member LLCs (disregarded for tax) only get the startup-cost $5,000, not the organizational-cost $5,000.
The phase-out at $50,000
For every dollar of startup costs above $50,000, your $5,000 immediate deduction shrinks by a dollar. At $55,000 in startup costs, your immediate deduction is $0 — the full amount must be amortized over 15 years.
How the amortization works for costs above $5,000
Whatever exceeds the $5,000 deducted in year one gets amortized over 180 months (15 years) starting the month the business began.
Example: $18,000 in startup costs, business begins July 1.
- Immediate deduction (year 1): $5,000
- Amortizable: $13,000
- Year 1 amortization: $13,000 ÷ 180 × 6 months = $433
- Year 1 total: $5,433
- Years 2–15 amortization: ~$867/year
The election is automatic (sort of)
Under current rules, you're deemed to have made the §195 election unless you affirmatively opt out. You don't have to file a separate form, but you do have to actually report the deduction on your return. If you never enter startup costs in your tax software, it won't magically appear.
Where it goes on Schedule C
Line 27a ("Other expenses"), labeled as "Startup costs §195" or similar. The amortization portion usually goes on Line 13 (Depreciation). Most tax software has a specific "Business startup" section that handles both.
What doesn't count
- Tangible assets — computers, equipment, furniture. These go under normal depreciation/Section 179/bonus rules.
- Interest expense — separately deductible on its own line.
- Real estate / land
- Costs after the business started — these are normal operating expenses, fully deductible.
The timing that trips people up
Your business "starts" when you begin actively operating — first sale, first client, first billable hour. Not when you formed the LLC. Not when you got the EIN. Not when you launched the website.
If you formed your LLC in March 2024 but didn't take your first client until September, the costs from March–August are startup costs. Costs from September onward are normal operating expenses.
Check your first-year return
Pull up the first year you had self-employment income. Look for "startup costs" or "amortization" on Schedule C. If there's nothing — and you remember spending money before your first client — you probably have an amendment to file.
Three-year statute of limitations applies. If your business started more than three years ago, the window is closed. If it was 2022 or later, you can still recover.
We flag missing startup cost deductions.
If your first-year return shows business income but no §195 deduction, we'll surface the question: did you have pre-launch expenses?