Start-Up Costs: GAAP Rules, Tax Treatment, and R&D Compared

Start-up costs are one-time costs to begin a new operation, such as a new business, facility, product, or territory, including organization costs to form an entity. Under U.S. GAAP (ASC 720-15), they are expensed as incurred, not recorded as an asset. For federal income tax, IRC Section 195 allows a deduction of up to $5,000 of qualifying start-up costs in the year the active trade or business begins. That limit is reduced dollar for dollar when those costs exceed $50,000 and reaches zero at $55,000. The remaining costs are amortized over 180 months, beginning with the month the business starts.

GAAP means U.S. generally accepted accounting principles. Start-up costs differ from research and development (R&D), even though both often end up as an immediate expense. Advertising, initial operating losses, and software spending also need their own classification.

The shared theme is simple: expecting future sales does not automatically create an asset. This guide covers the costs similar to R&D in Intermediate Accounting section 11.4. It ends with a short tax comparison, because book and tax treatment differ, and both show up on the CPA and EA exams.

What is the difference between start-up costs and R&D?

Start-up activities prepare an entity to begin a new operation. They can relate to a new business, location, product, service, or territory. Organizational costs are a subset: for example, legal work and state filing fees to form a business entity.

R&D seeks new knowledge or applies it to a new or significantly improved product or process. An existing company can incur start-up costs, and a young company can incur ordinary operating expenses. The company’s age does not determine the classification.

For the innovation boundary, review what qualifies as research and development costs. A customer survey may support a launch, but it does not become scientific R&D because the invoice says “research.”

Which start-up costs are expensed?

Examples include employee training for a new operation, preliminary feasibility work, and qualifying organization activities. These expenditures may benefit later periods, but the amount and timing of that benefit are uncertain. Under Accounting Standards Codification (ASC) 720-15, start-up activities within its scope are expensed when incurred.

The rule comes straight from the Financial Accounting Standards Board (FASB) Codification: ASC 720-15-25-1 requires the costs of start-up activities, including organization costs, to be expensed as incurred. You can see that paragraph cited in this SEC staff correspondence. The Journal of Accountancy also walks through startup costs for book and tax purposes side by side.

Do not classify everything paid before opening as start-up expense. A purchased machine, saleable inventory, or a prepaid service may meet its own asset recognition rules. Separate the items on an invoice rather than putting the whole launch budget into one account.

What is not a start-up cost?

ASC 720-15 lists costs that fall outside its scope. These follow their own guidance, even when you pay them before opening day:

• Buying or building long-lived assets, like equipment or a building, and getting them ready to use. See capital vs revenue expenditure.
• Buying or producing inventory.
• Acquiring intangible assets, such as a purchased license. See intangible assets accounting.
• Raising capital. Stock issue costs reduce additional paid-in capital. Qualifying issuance costs associated with recognized term debt are presented as a deduction from that debt’s carrying amount. Costs associated with line-of-credit arrangements may be presented as an asset and amortized over the arrangement’s term.
• Research and development, which follows ASC 730.
• Advertising, which follows ASC 720-35.
• Internally developed assets, such as internal-use software under ASC 350-40.

A launch-cost example with journal entries

Hypothetical example. Juniper Foods opens a new distribution location and forms a new subsidiary to run it. It pays $7,000 of legal and state filing fees to organize the subsidiary, $14,000 to train the opening team, and $5,000 for preliminary operating-feasibility work. Assume these amounts are start-up activities within ASC 720-15.

Debit Start-Up and Organizational Expense $26,000 and credit Cash $26,000. Separate expense accounts may also be used. The company should not create a $26,000 “launch asset” merely because management expects several profitable years.

Juniper also buys a $60,000 delivery vehicle. Assuming normal asset recognition conditions are met, record the vehicle separately and depreciate it over its useful life. Its purchase date before opening does not turn it into a start-up activity.

Can initial operating losses be deferred?

Suppose the new location earns $110,000 of revenue and incurs $145,000 of operating expenses during its first year, excluding the earlier $26,000 of start-up costs. Its operating loss from those stated amounts is $35,000. Report the revenues and expenses in that period.

The loss is the result of the revenue and expense entries, not an additional asset purchase. Do not debit a “deferred operating loss” account and plan to amortize it when the business becomes profitable. The same recognition rules apply to a new operation and an established one.

Keep the example’s assumptions clear: if the $26,000 start-up expense also belongs to Year 1, the combined effect of those costs and the stated operating results is a $61,000 loss before any other items. Do not accidentally include the start-up amount twice.

Advertising costs and brand value

For ordinary advertising within ASC 720-35, a company expenses costs as incurred or the first time the advertising takes place. Apply the selected policy consistently to similar advertising activities. The FASB’s amendments reproducing ASC 720-35-25-1 describe those alternatives.

Hypothetical example. A $6,000 advertisement is produced in December and first runs in January. An as-incurred policy expenses the qualifying production cost in December. A first-use policy defers it until January, assuming the advertising is expected to occur. Neither approach allows spreading the cost over an unsupported estimate of years of future sales.

A tangible advertising asset is different. A durable, reusable display structure can be an asset under the applicable property guidance. Also, a brand’s estimated market value does not automatically become a recorded asset because the company spent money advertising it. An attractive valuation estimate is not a journal entry.

Is software outside R&D always expensed?

Software for selling or administrative functions, such as a reservation or management-information system, is outside the R&D activity definition discussed here. However, it would be too broad to conclude that every cost of such software must be expensed.

Internal-use software has separate guidance in ASC 350-40 that can require capitalization of qualifying costs. FASB ASU 2025-06 explains the existing capitalization model and its amendments, which take effect for annual periods beginning after December 15, 2027, with early adoption permitted. Detailed software accounting is outside this lesson. The key point: deciding that a cost is not R&D tells you which rules apply, not whether the cost is expensed.

For reusable equipment and materials used in research, the relevant comparison is instead R&D capitalization and alternative future use. Avoid using one broad “future benefit” rule for all these different costs.

How are start-up costs treated for tax?

Everything above is financial reporting under GAAP. Federal income tax follows different rules, which is why start-up costs appear on the CPA FAR and REG exams and on the EA exam.

Under Internal Revenue Code (IRC) Section 195, a business can deduct up to $5,000 of start-up costs in the year its active trade or business begins. Organization costs get a separate $5,000 under Section 248 for corporations and Section 709 for partnerships. Each $5,000 is reduced dollar for dollar once that category’s costs exceed $50,000, so it disappears at $55,000. Whatever is not deducted right away is amortized evenly over 180 months (15 years), starting with the month the business begins.

Section 195 covers the costs of creating or investigating a new business. It does not include interest, taxes, or research and experimental costs. When an existing business expands in the same line of business, such as opening another store, those costs are generally deducted as ordinary business expenses under Section 162 instead. IRS Publication 583, Starting a Business and Keeping Records, summarizes these rules.

Book vs tax example

Hypothetical example. Maple Bakery Inc. is a new calendar-year C corporation that opens for business in January of Year 1. During January of Year 1, before opening, it incurred and paid $6,800 of organization costs (state incorporation fees and legal work to form the corporation) and $23,000 of start-up costs (pre-opening training wages and a local market study).

Book (GAAP): Expense all $29,800 in Year 1. Debit Start-Up and Organizational Expense $29,800 and credit Cash $29,800.

Tax, organization costs: Deduct $5,000 now. Amortize the remaining $1,800 over 180 months, which is $10 per month. Year 1 deduction: $5,000 + ($10 x 12) = $5,120.

Tax, start-up costs: Deduct $5,000 now. Amortize the remaining $18,000 over 180 months, which is $100 per month. Year 1 deduction: $5,000 + ($100 x 12) = $6,200.

Total Year 1 tax deduction: $5,120 + $6,200 = $11,320.

The $18,480 gap ($29,800 book expense minus $11,320 tax deduction) is a deductible temporary difference, because the company will deduct it on future tax returns. At the 21% federal corporate rate, ignoring state taxes, the deferred tax asset before any valuation allowance is $18,480 x 21% = $3,880.80. A valuation allowance reduces the asset if, based on the available evidence, it is more likely than not that some or all of the tax benefit will not be realized. Assume no valuation allowance is required in this example.

Common start-up cost mistakes on the CPA exam

These are the traps I see students fall into most often:

• Capitalizing organization costs under GAAP because tax amortizes them. For books, expense them. The 180-month amortization is a tax rule only.
• Calling stock issue costs organization costs. Underwriting, legal, and printing costs to issue shares reduce additional paid-in capital instead.
• Expensing assets bought before opening. Equipment, inventory, and prepaid items follow their own asset rules, even if paid before day one.
• Deferring the first-year operating loss. Report revenues and expenses in the period they happen.
• Assuming the company must be brand new. An established company opening a new facility, product, or territory can have GAAP start-up costs.
• Getting the phase-out wrong. The $5,000 shrinks only by the amount over $50,000. With $52,000 of start-up costs, the immediate deduction is $3,000 and $49,000 is amortized.

Want more questions like these? Practice in the CPA Test Bank, or try a few lessons first in the Farhat Lectures free sample course.

Interactive practice on start-up and organizational costs

Under U.S. GAAP (ASC 720-15), companies expense qualifying start-up costs, including organizational costs, as incurred. Answer three questions on new operations, entity formation fees, and expense timing.

Practice questions with explained answers

1. Can an established company have start-up costs?

Answer: Yes. Training and other qualifying one-time activities for a new operation can be start-up costs even when the company has operated elsewhere for decades.

2. A new business spends $8,000 on formation costs and $40,000 on usable production equipment. Must all $48,000 be expensed as start-up costs?

Answer: No. Expense the $8,000 of organizational costs. Evaluate and record the equipment under its own asset guidance; it is not a start-up activity just because the business is new.

3. Management expects next year’s profit to cover this year’s $20,000 operating loss. May the loss be deferred?

Answer: No. Expected later profits do not create an asset representing the current operating loss. Report current revenue and expense in the proper period.

4. A new business has $53,500 of start-up costs. How much can it deduct immediately for tax, and how much is amortized?

Answer: The costs exceed $50,000 by $3,500, so the immediate deduction is $5,000 minus $3,500, or $1,500. The remaining $52,000 is amortized over 180 months, about $288.89 per month. For GAAP, all $53,500 is expensed as incurred.

Key takeaways

• Under U.S. GAAP (ASC 720-15), start-up costs, including organization costs, are expensed as incurred.
• Equipment, inventory, and other assets bought before opening follow their own asset rules.
• Initial operating losses are reported in the period. They never become a deferred loss asset.
• Advertising is expensed as incurred or the first time it runs, applied consistently.
• For tax, IRC Section 195 allows up to $5,000 immediately (phased out above $50,000), with the rest amortized over 180 months, so book and tax results differ.

Frequently asked questions

Are organizational costs intangible assets under U.S. GAAP?

No. Qualifying organizational costs within ASC 720-15 are expensed as incurred, not recorded as intangible assets. The 180-month amortization you may have seen comes from tax law (IRC Sections 248 and 709), not GAAP.

Are advertising costs part of R&D?

Ordinary product promotion is a marketing activity. Its expense timing follows advertising guidance, not the R&D label.

Does expensing mean the spending has no future benefit?

No. The expenditure may help the business. The accounting question is whether the applicable guidance permits recognizing a measurable asset from that particular cost.

Can start-up costs be capitalized under U.S. GAAP?

No. ASC 720-15 requires start-up costs, including organization costs, to be expensed as incurred. Only items covered by other guidance, such as equipment or inventory, can be recorded as assets.

How much in start-up costs can a business deduct for tax?

Up to $5,000 of start-up costs in the year the business begins under IRC Section 195, plus up to $5,000 of organization costs for a corporation or partnership. Each $5,000 shrinks dollar for dollar above $50,000, and the rest is amortized over 180 months.

Are start-up costs treated the same way under IFRS?

Mostly, yes. IAS 38, Intangible Assets, requires start-up costs to be expensed when incurred unless they are part of the cost of property, plant, and equipment under IAS 16.

Are stock issuance costs organization costs?

No. Costs to issue shares, such as underwriting and legal fees for the offering, reduce additional paid-in capital. They are not expensed as start-up or organization costs.

Sources and lesson context

This original guide supports Wiley Intermediate Accounting, section 11.4: Research and Development Costs. All numerical examples and practice questions here are hypothetical and were created for this guide. Use the reporting framework and assumptions stated in your assigned problem.

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About the author

Mansour Farhat, CPA, CIA, DBA, is the instructor behind Farhat Lectures, where he teaches accounting students and CPA, CMA, and EA candidates through video lessons, practice questions, and exam-focused guides like this one.