Can I claim $5,000 startup costs deduction for my new LLC that's replacing my old sole proprietorship?

This is a great question about business entity changes. When you convert from a sole proprietorship to an LLC, the IRS typically views this as a continuation of the same business rather than starting a completely new one - especially if you're essentially doing the same activities. The $5,000 business startup cost deduction (under Section 195) is generally for completely new businesses. Since you're continuing the same business activities just under a different legal structure, those costs would likely be considered organizational costs rather than startup costs. The good news is you can still deduct up to $5,000 in organizational costs for creating the LLC, with any excess amortized over 15 years. The key distinction is that the expenses must be directly related to forming the LLC itself (legal fees, filing fees, etc.) rather than general business expenses that would have existed anyway.

After struggling with a similar situation last year, I found this amazing tool called taxr.ai (https://taxr.ai) that really helped clarify the difference between business startup costs and organizational costs for my new LLC. I was also transitioning from a sole prop to an LLC and was confused about what I could deduct. Their document analysis feature looked at my formation documents and expenses and clearly categorized what counted as organizational costs eligible for the $5,000 deduction versus regular business expenses. It saved me from potentially misclassifying expenses which could have caused issues if I got audited.

Just wanted to follow up on my skeptical comment above. I decided to try taxr.ai after all and wow, it really delivered. I uploaded my LLC formation docs and all my receipts from the transition (was about $7,300 in my case), and it clearly separated what qualified as organizational costs versus regular business expenses. It specifically pointed out that $4,800 of my costs qualified for the immediate $5,000 organizational cost deduction, while the rest were either regular business expenses or capital expenditures. The report it generated broke everything down with specific IRS references that I could show my tax preparer. Ended up saving me both money on my taxes and the prep fees!

If you're having trouble getting clear answers from the IRS about how to properly categorize these business transition costs, I highly recommend Claimyr (https://claimyr.com). I was in a similar situation and spent weeks trying to reach someone at the IRS who could give me a definitive answer about my specific situation. After finding Claimyr, I was connected to an actual IRS agent in under 15 minutes who walked me through exactly how to handle the transition costs for my LLC conversion. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent confirmed that organizational costs get the $5,000 deduction with the remainder amortized, and helped me understand which of my specific expenses qualified.

I have to eat my words about Claimyr from my comment above. After struggling for literally weeks trying to get clear answers about my business transition costs, I broke down and tried it. I'm still shocked that I was talking to an actual IRS representative in about 12 minutes. The agent walked me through exactly how the IRS views a sole prop to LLC conversion and confirmed that while it's considered a continuation of the same business, the organizational costs specifically for creating the LLC do qualify for the $5,000 deduction under Section 248 (not Section 195 which is for true startups). This cleared up so much confusion for me. Sorry for being so skeptical before - this service is legit and worth every penny for the time saved and stress avoided.

One thing nobody mentioned is that if you elected to have your LLC taxed as an S-Corp instead of staying as a disregarded entity, that might actually affect how some of these costs are treated. When I made the switch, my accountant had me split the costs between organizational expenses for the LLC itself and a separate category for the S-Corp election. Also make sure you're tracking ongoing annual expenses separately - like your LLC renewal fees which are just regular business expenses each year after formation.

Has anyone used TurboTax to handle this situation? I'm trying to do my taxes myself this year and I'm not sure if the software will know how to handle these organizational costs correctly or if I need to manually override something?

I see a lot of detailed responses here already but wanted to add that timing matters too. If you formally dissolved your sole proprietorship and formed the LLC as a completely separate entity with new EIN, business accounts, etc., you might have a stronger case for treating it as a new business eligible for startup costs rather than just organizational costs. Did you completely close out the sole prop and start fresh, or was it more of a conversion? That distinction can matter for how the IRS views it.

That's exactly the right approach, Khalil! Since you kept the same EIN and it's a single-member LLC taxed as a disregarded entity, the IRS will definitely view this as a continuation of your existing business rather than a startup. Your $6,700 in formation costs should be treated as organizational expenses under Section 248. You can deduct $5,000 immediately and amortize the remaining $1,700 over 15 years (about $113 annually). Make sure to keep detailed records separating the LLC formation costs (legal fees, state filing fees, operating agreement drafting) from any regular business expenses you might have incurred during the transition. One tip: if you had any costs related to transferring assets from the sole prop to the LLC (like updating contracts or transferring licenses), those might be treated differently than the pure organizational costs, so keep those receipts separate as well.