When Does a Business Officially Start? The IRS Weighs In

Starting a business comes with many expenses, but not all of them are immediately deductible. According to a recent Tax Court ruling (Eason, TC Summ. Op. 2024-17, 8/13/24), taxpayers cannot deduct start-up costs if the business never actually begins operations.

Understanding Start-Up Cost Deductions

The IRS allows businesses to deduct or amortize start-up costs—expenses incurred before officially opening for business. Generally, a business can:

1. Deduct up to $5,000 in start-up costs in the year it begins operations.
2. Amortize the remaining costs over 180 months (15 years).
3. Lose the $5,000 deduction entirely if total start-up costs exceed $55,000.

But what happens if the business never launches? The IRS doesn’t allow deductions for abandoned start-ups. That was the case in a recent ruling where a couple attempted to deduct $42,000 in education expenses for a business they never officially started.

Case Breakdown: When Is a Business Considered ‘Active’?

A couple in 2016 wanted to start a real estate education business. They paid $42,000 for training courses and set up an S corporation to operate their business. However, they never actually launched the company—there were no clients, no revenue, and little evidence of business activity beyond:

1. Printing business cards and stationery
2. Attending training sessions
3. Setting up an S corporation

The IRS denied their deduction because they never reached the point of accepting clients or generating income. The Tax Court agreed, ruling that the business was never “open for business,” meaning the start-up costs were not deductible.

Key Takeaways from the Ruling

1. A business must be operational before deducting start-up costs. Simply forming an entity or attending training isn’t enough.
2. The IRS looks at business activity—not intent. Having a business plan and expenses doesn’t mean a company is “open.”
3. Start-up cost deductions apply only when the business begins operations. No customers, no business, no deduction.

What Qualifies as a Start-Up Cost?

Start-up costs typically include:

1. Investigative costs – Researching market conditions, competitor analysis
2. Training expenses – Learning industry-specific skills (if directly related to business operations)
3. Legal and registration fees – Setting up an LLC, corporation, or obtaining necessary licenses
4. Marketing expenses – Advertising, website development, branding

What Doesn’t Count?

1. Personal education expenses (unless required for your specific business)
2. Costs unrelated to business operations
3. Expenses for businesses that never become active

Avoiding Tax Pitfalls with Start-Up Costs

1. Make sure your business is “active” before claiming deductions.
2. Document all business activity, including client communications, contracts, or product launches.
3. Consult a tax professional before deducting expenses for a new business.

The IRS has strict guidelines on when a business officially begins. If you plan to deduct start-up expenses, ensure you’re operating, accepting customers, and actively doing business.

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