Part 3: Can You Deduct Your Startup Costs? — The Smart Way to Launch Your Home Business

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Can You Deduct Your Startup Costs? — The Smart Way to Launch Your Home Business (2025)

Before your home business officially begins, you may spend money on planning, research, licenses, or initial marketing.
The IRS calls these startup costs — and they’re treated differently from regular business expenses.
This guide explains what counts as a startup cost, how much you can deduct in your first year, and the rules you must follow for 2025–2026.



1️⃣ What Are Startup Costs?

The IRS defines startup costs as amounts you spend before your business officially starts operating.
These are expenses you incur while investigating or preparing to open your business.
(Defined in Chapter 3 of the course material.) :contentReference[oaicite:1]{index=1}

Common IRS-approved startup costs:

  • ✔️ Market research, competitor analysis
  • ✔️ Creating a business plan
  • ✔️ Initial advertising or branding
  • ✔️ Legal and accounting fees to set up your business
  • ✔️ Business licenses and permits
  • ✔️ Professional consultations
  • ✔️ Initial office setup (supplies, software, training)

Not Startup Costs
• Buying inventory
• Buying equipment or long-term assets (these follow depreciation/179 rules)
• Ongoing expenses after you start operating (those are regular deductions)

2️⃣ When Does Your Business “Begin”?

Startup costs only apply before your business becomes active.
According to IRS guidance (summarized in Chapter 3), your business is considered “begun” when:

  • ✔️ You are ready to serve customers
  • ✔️ You start offering products or services
  • ✔️ You begin marketing to the public

After this date, your expenses become regular business expenses deducted on Schedule C.
(See “When Does a Business Begin?” in Chapter 3.) :contentReference[oaicite:2]{index=2}

💡 Example
You buy design software, attend training, and draft your business plan in April–May.
You take your first paying client on June 1.

✔️ Expenses before June 1 = startup costs
✔️ Expenses after June 1 = regular business expenses

3️⃣ How Much Can You Deduct in the First Year?

For 2025, the IRS allows you to deduct:

✔️ Up to $5,000 of startup costs in your first active year

This $5,000 deduction phases out if your total startup costs exceed $50,000.
(Same rule confirmed in the course text.) :contentReference[oaicite:3]{index=3}

Any remaining amount must be amortized — deducted over time.

4️⃣ The 15-Year Amortization Rule

Startup costs over $5,000 must be spread out evenly over:

✔️ 15 years (180 months)

This means if you incur $20,000 in startup costs:

  • $5,000 = first-year deduction
  • $15,000 = amortized over 15 years

What If Your Business Doesn’t Last 15 Years?
IRS rules allow you to deduct the remaining unamortized startup costs when you close the business.
(See Chapter 3: “If Your Business Doesn’t Last 15 Years.”)

5️⃣ Practical Strategies to Maximize Your Deduction

✔️ Smart Timing Tips
• Delay major purchases until the business officially “begins”
• Group pre-opening tasks into one short period to classify them clearly
• Start marketing early but begin “operations” only when ready
• Track and label every pre-opening expense
• If costs exceed $50,000, consider deferring non-essential spending

These strategies follow IRS rules and help keep more of your expenses in deductible categories.

6️⃣ Real IRS-Based Examples

💡 Example 1 — Low Startup Costs
A virtual assistant spends $2,000 researching tools and taking online courses.
Since the amount is under $5,000, she deducts the full $2,000 in her first year.

💡 Example 2 — High Startup Costs
A home-based catering business spends $12,000 on permits, initial advertising, and training.
Deduction:
• $5,000 immediate
• $7,000 amortized over 15 years

💡 Example 3 — Business Never Actually Began
Someone researches a drop-shipping business but never launches.
These costs are not deductible.
(IRS rule: costs of businesses that never begin cannot be deducted.)
(Chapter 3 reference.)

IRS Reference Links

📦 Small Business Essentials — Recommended Tools

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📚 Home Business Tax Deductions Series (2025)

  1. ① Is Your Home Business Really a Business?
  2. ② Do You Have a Profit Motive?
  3. ③ Can You Deduct Your Startup Costs?
  4. ④ Operating Expenses You Can Deduct
  5. ⑤ Section 179 & Bonus Depreciation
  6. ⑥ Home Office Deduction
  7. ⑦ The QBI 20% Deduction
  8. ⑧ Car & Local Travel Expenses
  9. ⑨ Out-of-Town Travel Rules
  10. ⑩ Inventory Rules
  11. ⑪ Employees vs. Contractors
  12. ⑫ Health Insurance & Medical Deductions
  13. ⑬ Retirement Plan Deductions
  14. ⑭ Additional Business Deductions
  15. ⑮ Crypto in Your Business
  16. ⑯ Recordkeeping & Accounting
  17. ⑰ Spouses in Business Together
  18. ⑱ How to Avoid an IRS Audit

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