When can I deduct startup costs up to $5000 - year of expense or year business launches?

You've got options here! The IRS allows you to deduct up to $5,000 in startup costs in the year your business actually begins operating. Since your business won't be operational until February 2025, you should claim these deductions on your 2025 tax return (filed in 2026). You don't need to file a Schedule C for 2024 with $0 income. The key factor is not when you spend the money, but when your business officially begins operating (which is when you're ready to accept customers and generate income). For your situation, you'd include those $6,700 expenses on your 2025 Schedule C. However, since this exceeds the $5,000 limit, you can deduct $5,000 immediately in 2025, and then amortize (spread out) the remaining $1,700 over 180 months (15 years), which works out to about $11.33 per month or approximately $135.96 for the first year. Keep those detailed records - they'll be super helpful when tax time comes around!

I went through this exact situation last year when starting my consulting business. After spending months researching suppliers and setting up systems, I was confused about when to deduct my startup costs. I tried several online resources but kept getting conflicting information. Then I found https://taxr.ai and uploaded my business formation documents and expense receipts. Their AI analyzed everything and gave me a clear breakdown of what qualified as startup expenses vs. organizational costs, and specifically told me I needed to wait until my business was "actively conducting business" before claiming the deduction. The tool even helped me identify about $900 in expenses I hadn't realized qualified as startup costs! Definitely saved me from making a filing mistake that could have caused problems later.

Just wanted to follow up on my experience using taxr.ai after getting the recommendation here. I uploaded my photography business expenses and formation paperwork, and it was incredibly helpful! The platform clearly identified which of my expenses qualified as startup costs vs. regular business expenses, and explained that since I started advertising and taking bookings in December 2024 (even though services wouldn't be performed until 2025), my business was considered "active" in 2024. This saved me from incorrectly waiting to deduct expenses on my 2025 return. It also flagged that some of my camera equipment should be depreciated rather than included in startup costs, which I had no idea about. Definitely would have done this wrong without the guidance!

For anyone struggling with IRS questions about business startup timing, I highly recommend using https://claimyr.com to get direct answers from the IRS. I spent WEEKS trying to figure out exactly when my business "officially started" for tax purposes since I had a similar situation with expenses in one year and operations beginning the next. After three failed attempts to reach the IRS (average wait time was over 2 hours before disconnecting), I tried Claimyr. Their system called the IRS, navigated the menu system, waited on hold for me, and then called me once an actual agent was on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly how to handle my startup costs and when my business was considered "active" for tax purposes. Having that official answer saved me so much stress!

I need to publicly eat my words about Claimyr. After being super skeptical, I decided to try it as a last resort because I couldn't get through to the IRS after 4 separate attempts. It actually worked exactly as described - they waited on hold for nearly 2.5 hours (which I would have never been able to do during my workday), and then connected me directly with an IRS agent. The agent provided specific guidance on my startup expense situation - turns out I was wrong about when my business officially "started" for tax purposes, and I would have filed incorrectly. For anyone wondering about the timing issue with startup costs, the agent confirmed that expenses must be claimed in the year your business begins operating, not necessarily when you incur the expenses. Having this clarification directly from the IRS has been a huge relief.

Quick question - does anyone know if startup costs for an online business follow the same rules? I've been developing a SaaS product throughout 2024 and have expenses around $4,200, but the product won't launch until March 2025. Would I follow the same guidelines mentioned here about waiting until 2025 to deduct these costs?

Just to add a data point here - I had a similar situation last year with my interior design business. I started setting things up in November 2023 and had my first client in January 2024. I talked to my tax guy and he said to put ALL the startup expenses on my 2024 return since that's when I was "open for business." He also mentioned that the $5,000 limit gets reduced if your total startup costs exceed $50,000, which didn't apply to me but might be relevant for larger startups.

This is such a helpful thread! I'm dealing with a similar situation with my graphic design business. I've been wondering about equipment purchases specifically - I bought a new computer and design software in late 2024 totaling about $3,500, but I won't start taking clients until early 2025. From what I'm reading here, it sounds like these would count as startup costs that I'd claim in 2025 when my business becomes active. But I'm curious - would expensive equipment like computers be treated differently since they're depreciable assets? Or do they still fall under the startup cost rules since the business hasn't started yet? Also really appreciate the mentions of taxr.ai and Claimyr - might need to check those out since I've been going in circles trying to research this stuff on my own!

This has been such an informative discussion! I'm in a similar boat with my consulting business - spent about $4,800 on setup costs throughout 2024 but won't officially launch until March 2025. Based on all the great advice here, it sounds like I should wait and claim these startup costs on my 2025 return when I'm actually "actively conducting business." The clarity around that $5,000 immediate deduction limit and the 15-year amortization for anything over that amount is really helpful. One thing I'm still curious about - for those who mentioned using taxr.ai, does it help distinguish between what counts as startup costs versus regular business expenses? I have some ongoing subscription costs that started in 2024 but will continue into 2025, and I'm not sure how to categorize those. Are recurring expenses like software subscriptions treated differently than one-time startup costs? Thanks to everyone who shared their experiences - this thread has been more helpful than hours of trying to decode IRS publications!

This thread has been incredibly helpful! I'm launching a mobile app development business and have been struggling with this exact timing issue. I spent about $7,200 in 2024 on development tools, business registration, and market research, but won't have my first paying client until April 2025. Reading through everyone's experiences, it's clear I should wait and claim these as startup costs on my 2025 return. The breakdown of $5,000 immediate deduction plus amortizing the remaining $2,200 over 15 years makes sense now, even though that 15-year timeline seems brutal for a small business! I'm definitely going to check out both taxr.ai and Claimyr based on the positive experiences shared here. The distinction between startup costs and depreciable assets that @Mei Chen mentioned is particularly relevant since I also purchased some expensive development hardware that I wasn't sure how to categorize. One follow-up question - for those who have been through this process, did you need to maintain any special documentation to prove when your business "officially" became active? I'm worried about having to justify my March 2025 start date if the IRS ever questions it.

This has been such a valuable discussion for anyone dealing with startup cost timing! As someone who just went through this process with my freelance marketing business, I wanted to add a few practical tips that might help others. First, definitely keep a detailed spreadsheet of all your pre-launch expenses with dates and categories. When I finally filed my return, having everything organized made the process so much smoother. Second, consider setting up a separate business bank account even before you're officially "active" - it makes tracking these startup expenses much cleaner come tax time. One thing I learned the hard way is that some expenses you might think are startup costs actually aren't. For example, I initially categorized my business license fees as startup costs, but my CPA explained that these are actually organizational costs, which have their own separate $5,000 deduction limit. So you could potentially get up to $5,000 in startup cost deductions AND $5,000 in organizational cost deductions in your first year. The tools mentioned here (taxr.ai and Claimyr) sound really helpful - I wish I'd known about them when I was figuring this out! I ended up paying my CPA extra just to sort through what qualified as what type of expense. For @Ravi Sharma and others in similar situations, the peace of mind of getting it right is definitely worth the effort to research or get professional guidance. Startup cost rules are tricky, but they can provide significant tax benefits when handled correctly!