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Start-Up and Organizational Costs
Getting Started Costs May Bring Tax Benefits

What Are Start-Up And Organizational Costs?

Starting a new business can bring significant costs for owners and investors, even before opening. These costs may be tax-deductible.

Start-up costs are the costs associated solely with the implementation of a plan, project, or business. start-up costs typically represent the costs incurred before the realization of benefits from start-up. Under certain conditions, and in some countries, firms can amortize start-up costs across a period of several years.

In business, organizational costs are the costs specifically of organizing a corporation (e.g., the cost of legal services or the "cost" of "organizational" meetings).

The distinction between start-up costs and other costs is vital to investors, new firm owners, and project managers for at least two reasons:

  • Business firms plan and budget "start-up" and "organizational costs" differently from the ways they plan and budget ordinary capital expenditures and operating expenses.
  • These costs may be subject to special treatment by tax authorities that does not apply for other expenditures and expenses.

Explaining start-up Costs In Context

Sections below further define and explain start-up and organizational costs for new companies and projects, emphasizing three themes:

  • First, Defining Start Up and Organizational costs for companies.
  • Second, Identifying project costs that qualify as project Start Up Costs.
  • Third, illustrating situations where Start-Up and Organizational Costs may be tax-deductable or amortizable.

Contents

Related Topics

  • Break-even analysis shows how firms calculate the business volume they must reach to become profitable.
  • Payback Period shows how start-ups calculate the time needed to become profitable.
  • Cash on Cash ROI explains how start-up investors gain investment leverage.

The Primary Business Start-up and Organizational Costs
Example Business Start-up Costs

When a new business is starts in the United States, eligible start-up costs and organizational costs qualify as capital costs which the firm can amortize across a specific timespan (see the links to tax information in the following section for more details on US rules and specifics for other countries).

Business firms can amortize a start-up cost when it meets two conditions.

  • Firstly, It is a cost eligible for the deduction if paid or incurred to operate an existing active trade or business.
  • Secondly, the firm incurs the cost before active trade or business begins

Business start-up costs may include such things as

  • Market research and market analysis
  • Analysis or research on labor supply, site
    suitability, transportation
  • Travel and expenses for securing distributors or suppliers
  • Consulting fees before opening
  • Executive salaries before opening
  • Advertising for business opening
  • Employee salaries and training expenses before opening
  • Travel and costs for acquiring customers

Those costs are generally eligible start-up costs for a new business. When purchasing an existing business, already in operation, start-up costs eligible for amortization include only the costs or investigating or searching for existing business.

Start-up costs in either case (new business or purchase of existing business) do not include taxes and interest that firms can otherwise deduct, and usually, do not cover research and development costs.

The costs of organizing a corporation ("organizational costs") may also qualify for amortization as capital expenditures if the firm incurs the costs specifically to create the corporation. These typically include such things as the costs of legal services, incorporation fees, the use of temporary directors, and the cost of organizational meetings.

Do Projects Have Start-up Costs?
Can a Plan Have Start-up Costs?

It is essential to estimate the full extent of the project or plan start-up costs before starting because these costs may be substantial. As a result, they may severely affect business case analysis and financial metrics that play a role in deciding whether or not to implement the plan or project. These costs may impact a proposed project's estimated return on investment (ROI) or total cost of ownership (TCO), for instance.

For planning and decision-making purposes, project or plan start-up costs may include capital costs (e.g., for an acquisition of assets acquired for the project or plan) and operating expenses. These qualify as start-up costs if:

  • The firm incurs these costs before realizing income or other benefits from the start-up, and
  • The firm pays them only if the start-up in fact starts. 

A wide range of cost categories may meet these criteria, including such things as costs for

  • IT system acquisition
  • Laboratory equipment acquisition
  • Pre-program advertising
  • Building reconfiguration
  • Legal services
  • Purchase of permits/licenses
  • Feasibility studies
  • Recruiting and hiring project/plan staff
  • Development costs
  • Set up costs, integration services
  • Deployment costs
  • Initial training cost

Can Firms Amortize Start-up Costs?
Are Start-up Costs Tax Deductible?

Tax treatment of start-up and organizational costs varies from country to country.  Links to guidelines from six nations taxing authorities appear below.

  • For Canada, the Canada Revenue Agency describes the classification and tax treatment of Business Start-up Costs in Income Tax Interpretation Bulletin IT-364, Commencement of Business Operations
  • For tax treatment of start-up costs in the Republic of Ireland, see Inland Revenue Publication IT48, Starting in Business-A Revenue Guide. 
  • For the United Kingdom, HM Revenue and Customs has available several publications on tax considerations from the web page "Starting a Business," access at www.hmrc.gov.uk/ct/getting-started/new-company/start-up.htm
  • The United States Government Internal Revenue Service IRS describes tax rules for declaring and amortizing start-up and organizational costs in US IRS Publication 535, Business Expenses. A PDF version of Publication 535 is available here.

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