If you spent money getting your business ready before its official start date, you may be able to deduct those costs. The IRS calls these startup costs, and it has specific rules for how much you can deduct right away and how much is spread over time. Including them in your books from the start helps make sure you don't miss deductions you may be entitled to.
This article is written for S Corp tier members starting a new business. The same startup cost rules generally apply to LLC tier members, with the costs reported on Schedule C of your Individual Tax Return (ITR).
An example scenario
Let's look at Max, who's launching a marketing consulting business. He joins Collective in July and plans to officially start his business in October, so he chooses October 1 as his S Corp effective date with the IRS (the Box E date on his Form 2553).
To prepare, Max has expenses from July to October, such as a new computer, software subscriptions, business-related meals, and fees for setting up his business through Collective.
When Max completes his accounting setup in his Collective dashboard, he should include these pre-launch expenses, including any he paid from personal accounts, so they're recorded in his company's books. His Collective team will sort out which expenses count as startup costs and which are handled another way, like equipment. If he's not sure whether an expense counts, he can reach out to his Collective team.
How startup costs are deducted
Under current law, how much you can deduct in your first year depends on your total startup costs:
| Total startup costs | First-year deduction | The rest |
| $50,000 or less | Up to $5,000 | Spread evenly over 15 years |
| $50,001 to $55,000 | $5,000, reduced by every dollar over $50,000 | Spread evenly over 15 years |
| Over $55,000 | None | All of it spread evenly over 15 years |
Spreading a cost over several years is called amortization. For example, if Max's startup costs total $8,000, he could generally deduct $5,000 in his first year and spread the remaining $3,000 over 15 years, about $200 a year. For S Corp tier members, this is accounted for when Collective prepares your Business Tax Return (BTR).
What counts as a startup cost
Generally, a startup cost is an expense that meets both of these:
- You'd normally be able to deduct it if your business were already up and running.
- You paid it before your business officially started.
Common examples include:
- Advertising for your business launch
- Wages for training new employees, and for the people training them
- Travel to meet prospective customers, suppliers, or distributors
- Initial software setup costs
Only expenses tied to the business you're starting count. For Max, that means costs that support his marketing consulting work. An expense that doesn't directly support that business may not qualify.
What isn't a startup cost
- Equipment and other assets, like a computer. These are generally depreciated, meaning deducted over time, though they may qualify for a faster write-off.
- Costs of forming your business entity, like state filing fees. These are organizational costs, which follow a similar but separate set of rules.
Next steps
If you're not sure whether an expense qualifies, reach out to your Collective team.
Disclaimer: The information contained in this article is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.