Money spent before your business begins operating is capital by default under IRC §195 — not immediately deductible. The election lets you deduct up to $5,000 of startup costs in your first year, reduced dollar-for-dollar once total startup costs exceed $50,000, with the remainder amortized ratably over 180 months. At $55,000+ of startup costs the immediate deduction is fully phased out and everything amortizes. (These figures are statutory in §195(b)(1) and are not inflation-indexed.)
What counts as a startup cost — two tests, both required: (a) paid to investigate or create the business (market research, pre-opening advertising, pre-opening training, travel to find suppliers/locations, consultant fees), AND (b) it would be deductible if paid by an existing active business.
What does NOT count:
- Equipment and other depreciable property → §179/bonus/MACRS, not §195.
- Inventory.
- Interest, taxes, and R&E expenditures → excluded by §195(c)(1).
- Organizational costs → separate regime.
Startup vs organizational costs — two different $5,000 allowances: §195 covers investigating/creating the business; §248 covers corporation organizational costs (incorporation/charter fees) and §709 covers partnership organizational costs. Each has its own separate $5,000 / $50,000 phase-out / 180-month structure — a new corporation can have a §195 allowance AND a §248 allowance.
The launch-date line: §195 only applies to pre-operational spend. Once the business is active, spending is an ordinary §162 deduction. "Begins" ≈ when the business is ready and available to provide its goods or services, not the first sale. The same $3,000 of advertising is a §195 startup cost the week before launch and a full §162 deduction the week after — the date decides the treatment.
Sole proprietors report startup costs on Schedule C Part V / Line 27a, with amortization on Form 4562 Part VI (IRS Pub 583). Full guide: Startup Costs Tax Deduction. ExpenseBot captures pre-launch receipts from Gmail into a Google Sheet you own so the trail exists when you file. Estimates — confirm with your tax professional.