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Start Up and Organizational Costs
Definitions, Meaning Explained, and Examples

 

Start up costs for a new business can sometimes be amortized across several years. However, tax laws on start up costs differ substantially from country to country.

Starting a new business can bring significant costs for owners and investors, even before the business opens.

What Are Start Up and Organizational Costs?

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 prior to the realization of benefits from the plan, project or business. 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 important 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 for projects. The final section briefly discusses start up cost tax consequences in different countries. Explanations appear in context with terms including the following:

Start Up Costs
Organizational Costs
Capital Costs
Amortization
Project Start Up Costs
Tax Deductions
 

Contents

Related Topics

  • Break even analysis shows how firms calculate the business volume they must reach in order 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
 

New Business Start Up and Organizational Costs

When a new business is starts up In the United States, eligible start up costs  and organizational costs qualify as capital costs which the firm can amortize across a specific time period (see the links to tax information in the following section for more information 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 that could be deducted 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, and so on.
  • Travel and expenses for securing distributors or suppliers.
  • Consulting fees prior to opening.
  • Executive salaries prior to opening.
  • Advertising for business opening.
  • Employee salaries and training expenses prior to opening.
  • Travel and expenses 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 are limited to 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 include research and development costs.

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

Can a Plan or Project Have Start Up Costs?

It is important to estimate the full extent of project or plan start up costs before starting because these costs may be substantial. As a result, they may seriously impact 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 acquisition of assets acquired for the project or plan) and operating expenses. These may be called start up costs if:

  • The firm incurs these costs before realizing income or other benefits from the project or plan. and
  • These costs are incurred only if the project or plan is implemented. 

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
  • Acquisition 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 These Costs Tax Deductible?

Tax treatment of startup and organizational costs varies from country to country.  Links to guidelines from six countries 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, available online at
    www.cra-arc.gc.ca/E/pub/tp/it364/it364-e.html
     .
  • For tax treatment of start up costs in the Republic of Ireland, see Inland Revenue Publication IT48, Starting in Business-A Revenue Guide.  A PDF version of Publication IT48 is available by clicking here.
  • For New Zealand, some information on tax handling of pre-production activities, including research and development, is available on the NZ Inland Revenue web page "Research and development (R&D) tax credit," available at
    www.ird.govt.nz/rd-tax-credit/eligibility/excluded-activities/pre-production
    .
  • 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.