What expenses can I incur when starting a new business?

Starting a business is exciting—but it can also get expensive quickly. One-time startup and organizational costs often add up faster than many entrepreneurs expect, impacting your initial budget before you even open your doors. 

The good news? Many of these costs are tax-deductible if recorded properly. Setting up your financial books the right way from the beginning can unlock valuable deductions and position your business for a stronger financial start. 

Properly tracking these early investments also lays the groundwork for good financial habits—giving you better control, clarity, and confidence as your business grows. 

Here’s a breakdown of what expenses you can expect—and how to manage them for maximum tax benefit. 

What are organizational costs? 

Organizational costs are the expenses tied directly to officially forming and registering your business entity—whether it's an LLC, corporation, or partnership. These are the essential steps that legally establish your business and get you ready to operate. 

Common examples include: 

• Legal Fees: Costs for drafting key documents like operating agreements, bylaws, or partnership agreements. 
• State Fees: Filing fees paid to the state when submitting your Articles of Incorporation or Organization. 
• Licensing and Registration Costs: Fees for securing the necessary permits, business licenses, and tax registrations required by your local, state, or federal government. 
• Office Supplies: Initial setup costs for basic materials like paper, pens, printers, folders, and filing systems to get your operations off the ground.

Organizational costs usually happen before your business officially opens but are necessary to create the legal structure that supports your operations from day one. 

What are startup costs? 

Startup costs are the expenses you incur while getting your business ready to open—before you officially start selling goods or services. They represent the investments made during the crucial preparation phase, when you’re laying the operational groundwork. 

Common examples include: 

• Market Research: Costs for surveys, feasibility studies, and competitive analysis that help you validate your business idea and target market.
• Assets and Equipment: Purchases like computers, manufacturing machinery, office furniture, and point-of-sale systems needed to support your daily operations. 
• Initial Employee Salaries: Payroll expenses for employees you hire during the setup phase, such as administrative staff, managers, or specialized workers. 

Startup costs can vary widely depending on the nature of your business. For instance: 

• Restaurant businesses often face substantial costs due to kitchen equipment purchases, build-outs, permits, and compliance with health and safety regulations. 
• Real estate businesses typically deal with moderate startup expenses related to licensing fees, marketing campaigns, and office lease setup. 
• Service-based businesses like consulting generally have lower startup costs, often limited to purchasing computers, business software, and initial marketing materials. 

Regardless of your industry, carefully tracking these early expenses is critical. Not only will it help you monitor cash flow, but it also ensures you’re positioned to maximize your available tax deductions when you file. 

How do I track, categorize, and deduct startup and organizational expenses? 

Accurate financial recordkeeping isn’t just good practice—it’s critical if you want to maximize your tax deductions and stay audit-ready. Poorly organized books can easily lead to missed opportunities and higher tax bills. 

Here’s how to set yourself up for success: 

• Keep Detailed Receipts: Save copies of every receipt, invoice, and bank statement connected to your startup activities. Store them digitally or in a secure filing system to make retrieval easy. 
• Document the Business Purpose: For every purchase, jot down why the expense was necessary to start or organize your business. This simple habit can make a big difference if you ever need to defend a deduction. 
• Record Dates Carefully: Capture the exact date when each expense was incurred—not just when it was paid—to ensure your deductions align properly with your business start timeline. 
• Use Bookkeeping Software: Tools like QuickBooks or Xero can help you categorize expenses clearly. Create distinct categories for startup costs and organizational costs to avoid confusion later. 

Clear, thorough records don't just simplify tax time—they ensure you're fully prepared to support your deductions in the event of an IRS audit. 

Tax Write-Off Methods for Startup and Organizational Expenses 

According to current IRS guidelines: 

• You can deduct up to $5,000 in startup costs and $5,000 in organizational costs during your first year of active business operations. 
• If your startup or organizational expenses exceed $50,000, your first-year deduction gets reduced by the same amount, dollar for dollar, above that limit. This reduction happens once, in your first year. 
• Any remaining expenses must be amortized over 180 months (15 years)—meaning you'll spread the deduction out evenly over time. 

Understanding these limits upfront can help you budget smarter and avoid surprises at tax time. 

You can find more about business expense deductions directly from the IRS here. 

The bottom line 

Some startup and organizational costs—like state incorporation fees and legal agreements—are predictable and easy to budget. Others vary depending on your business model, industry regulations, and operational needs. 

The key to maximizing your deductions is starting strong: 

• Track expenses carefully from day one. 
• Categorize startup and organizational costs separately in your financial system. 
• Keep clear documentation tied to each expense, including receipts, invoices, and business purpose notes. 

If you're unsure about navigating these deductions or want help setting up your bookkeeping correctly from the start, professional advice can make a big difference. 

Ready to optimize your startup finances? Schedule a free consultation with one of our experienced advisors today.