Start-Up Costs and Research Expenses

Money spent to get a business ready to open, and money spent on developing new products or software, follow special tax rules. These costs are not ordinary day-to-day expenses, so they cannot always be deducted when paid. This guide explains the two sets of rules: start-up and organizational costs, and research and experimental costs under Section 174A, which the One Big Beautiful Bill Act (Public Law 119-21) restored for domestic research starting in 2025.

Start-up costs

Start-up costs are what you spend before your active business begins, for example investigating a business, advertising, travel, surveys, training employees and professional fees to get ready. Costs of buying or building long-lived assets are not start-up costs. They are recovered through depreciation.

The rule works like this:

1. Total your start-up costs.
2. Deduct up to $5,000 in the year the business begins. If the total exceeds $50,000, the $5,000 is reduced dollar for dollar by the excess, and it disappears at $55,000.
3. Amortize the remainder over 180 months (15 years), starting with the month you begin business operations.

For costs paid after September 8, 2008, the Form 4562 instructions say the deduction is elected without any statement on the return. Corporations and partnerships get the same treatment for organizational costs, such as legal fees to set up an entity. See business formation for what an entity setup includes.

Two cautions. First, the clock starts when the business begins operating, not when you form the entity. Second, if the business never opens, the rules for abandoned ventures are different. Ask a professional before taking a deduction.

Research and experimental costs

Research and experimental (R&E) costs are costs incurred to discover information that eliminates uncertainty about developing or improving a product, process, formula or software. For tax years beginning in 2022 through 2024, a prior law change required companies to capitalize domestic R&E costs and amortize them over five years. That raised taxable income for many startups and small manufacturers.

The One Big Beautiful Bill Act added Section 174A for domestic research costs paid or incurred in tax years beginning after December 31, 2024:

• Current deduction. You can deduct domestic research expenditures in the year paid or incurred.
• Optional amortization. Alternatively, you can elect to capitalize and amortize them over at least 60 months, starting with the month you first realize benefits. The election is made by attaching a statement to the return by its due date, including extensions.
• Foreign research. Research performed outside the United States is still amortized ratably over 15 years.
• Software. Amounts paid in connection with developing software are treated as research expenditures.

Catching up on 2022 to 2024 costs

IRS Revenue Procedure 2025-28 describes the transition options:

• Unamortized domestic costs from 2022 to 2024 can generally be deducted in the first tax year beginning after 2024 (usually 2025), or spread evenly over 2025 and 2026. This is reported on Form 4562, Part VI.
• Small business retroactive election. Businesses with average annual gross receipts of $31 million or less for the three prior years (for 2025) could elect to apply the new rules back to tax years beginning after 2021, which allowed amended returns for 2022 through 2024. The deadline for that election was July 6, 2026, so it has now passed. If you think you qualified and did not make the election, a tax professional can review your records and your options.

Related rules and coordination

• Research credit. The credit is separate from the deduction. See research credit. If you claim the credit, domestic R&E expenses are generally reduced by the credit unless you elect the reduced credit.
• Startups with no income. Immediate deductions can create a loss that carries forward. Consider the timing against your plans for revenue.
• Entity level. For partnerships and S corporations, the elections are generally made at the entity level and flow to owners.

Common mistakes

• Treating all pre-opening costs as ongoing expenses.
• Failing to track the date the business starts.
• Mixing asset purchases into start-up costs.
• Missing the Section 174A statement when electing to amortize.
• Not reviewing prior-year treatment of 2022 to 2024 research costs.

How we can help

We can help classify costs as start-up, organizational, research or asset costs, prepare Form 4562 and the related statements, and review whether your 2022 to 2024 research treatment needs attention. For new ventures, we also help with entity choice and setup. See our business formation and tax planning services, or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.