What you can (actually) deduct as a startup in 2026

It’s no secret that the U.S. tax code favors entrepreneurs, and deductions — business expenses that lower your taxable income — are a clear example of this. 

But that doesn’t mean every new founder or small business owner should buy a G-Wagon on December 31 to get their business off the ground. (Contrary to what you may have seen on social media, it’s likely not tax deductible.)

With tax season now upon us, we’ll explain what you can actually deduct as a new business, changes to the tax code, and how you can build a financial stack that scales with you.

The IRS groups startup-related expenses into two categories: “startup” (Section 195) and “organizational” costs (Section 248 or 709). Both types of deductions benefit you as a business owner, but they must be tracked and reported separately. Here’s how to distinguish between these two types of expenses.

IRS-qualified startup costs

To be deductible, the expense must be “ordinary and necessary.”

Common examples include:

• Market research: This includes expenses associated with conducting surveys, analysis of potential markets, or scouting for business locations. For example, market research could involve hiring a customer research consultant or paying a contractor to study foot traffic near a potential brick-and-mortar location.
• Advertising: This includes pre-opening promotional efforts, like social media campaigns, branding, and press releases. For example, advertising could involve purchasing LinkedIn ads to build a pre-launch waitlist or printing materials for a direct mail campaign . 
• Onboarding and training: This includes fees for instructors, material rentals, and wages for staff during training sessions. Purchasing a certification course for your engineers or paying employees their wages to help prepare your store for opening day are other examples. 
• Travel: This includes expenses for securing suppliers, vendors, or early customers before official operations begin. For example, business travel could involve flying to another city for in-person investor pitches or driving to a trade show to interview wholesale suppliers. 

How “organizational” and “startup” costs differ

The IRS treats organizational and startup costs as separate categories with their own deduction limits. Here’s what you should know:

• Organizational costs: These are strictly tied to the legal creation of your business entity. This includes state incorporation fees, legal fees for drafting bylaws or operating agreements, and accounting fees for setting up your initial books.
• Startup costs: These are the pre-launch operational expenses mentioned above.

What isn’t deductible as a startup-related expense

Not every purchase you make while starting your business can be deducted as a startup-related expense. Some purchases are completely disallowed (such as personal expenses), and others are covered under separate tax codes.

Here’s what you can’t deduct as a startup expense:

• Personal expenses: The IRS scrutinizes “lifestyle” costs claimed as business expenses. If you purchase a new TV to hang in your living room to practice investor presentations, this may increase your chances of an IRS audit. And that could lead to penalties, having to repay the taxes, or other consequences. 
• Capital expenditures (capex) and research and development (R&D): Although large assets — like machinery, vehicles, or real estate — don’t qualify as startup-related expenses, they can be deducted through Section 179 (bonus depreciation), which allows owners to write off up to $2.5M of qualifying equipment and software for the 2025 tax year. This could, for instance, include servers for your tech startup or kitchen equipment for your restaurant. Beyond the capex bonus depreciation, you may also be eligible to offset payroll taxes or income tax through the R&D tax credit.
• Tax and interest: These expenses are addressed by other sections of the tax code (Sections 163 and 164) and, therefore, don’t count as startup expenses. 

While the tax code offers new-business incentives to entrepreneurs, there are limits to how much you can deduct. It all depends on how much you’ve spent getting your business off the ground.

Maximum immediate deduction threshold in 2026

You can elect to deduct up to $5,000 in startup costs and an additional $5,000 in organizational costs in the year your business officially begins. This allows for a potential immediate write-off of $10,000.

The phase-out rule

These immediate deductions are subject to a dollar-for-dollar phase-out:

• If your total startup (or organizational) costs exceed $50,000, your immediate deduction decreases by the amount over that limit.
• For example, if you spend $52,000 on startup costs, your immediate deduction drops to $3,000.
• If your costs reach $55,000, the immediate deduction is eliminated entirely.

The phase-out rule applies separately to startup costs and organization costs. Meaning, if your startup costs reach $55,000, you may still be eligible to deduct up to $5,000 in organizational costs, if your spending in this category remains under $50,000.

How can you claim the full $10,000 immediate deduction? 

In order to claim the full $10,000 immediate deduction, you’ll need to spend over $5,000 each on qualifying startup and organization costs, but stay under the $50,000 threshold for both. 

Amortization over 15 years

Any startup or organizational costs that aren't immediately deducted must be amortized. This means you’ll spread the deduction out evenly over 180 months (15 years), beginning with the month your business starts active operations. 

In other words, it’s not that you can’t deduct more than $5,000 in startup-related expenses, you just have to deduct them a little at a time.

Startup expenses and ongoing business expenses often cover the same types of transactions, but result in different tax treatment by the IRS. The difference comes down to timing — specifically, the moment your company is ready to operate and perform the activities for which it was organized.

Here’s what to know about pre-launch versus post-launch expenses:

• Pre-launch (Section 195): Before you launch your business, expenses like market surveys or travel are "startup” costs. These are capped at the $5,000 immediate deduction, with the remainder amortized over 15 years.
• Post-launch (Section 162): Once you begin active operations (e.g., your software product goes live or your store opens), those same costs become ordinary and necessary business expenses. These are 100% deductible in the year they occur, without the $5,000 limit or 15-year amortization schedule.

If you formed a limited liability company (LLC) in 2025, you may have specific questions about how these rules apply to your structure, such as:

• Can you deduct LLC formation fees? Yes, fees paid to the state for registration and legal fees for your operating agreement qualify as organizational costs.
• What if the business never launches? Startup costs are only deductible if your business actually starts up. As a reminder, your business doesn’t have to be generating revenue, but you must be in a position to begin generating revenue. For example, you must be able to accept payment and fulfill delivery of the product or service. 
• How to document your deductions: The IRS requires detailed records for all business use. This includes mileage logs, itemized travel receipts, and dated records documenting the business purpose of each vendor payment. You can automate these workflows with Mercury’s accounting tools.

Establishing accounting hygiene early on will save you from future headaches — and potentially an IRS audit. Here are common tax mistakes to avoid::

1. Forgetting pre-launch tracking: Many founders only start tracking expenses once they have a bank account. However, you can deduct expenses incurred during the development phase, even if your business wasn’t yet operational.
2. Commingling funds: Founders should avoid using personal credit cards for business expenses whenever possible. The one exception is filing fees for your entity formation. You’ll typically need to pay for this expense from a personal account, since you probably won’t have a business bank account or business credit card yet. Keep track of this transaction, since it will be categorized as an owner contribution and can be reimbursed to you later. 
3. Misclassifying items: Treating a capital expenditure (such as a $4,000 server) as a startup expense, rather than bonus depreciation under Section 179, can lead to filing errors.

When tax season arrives, the way you report these deductions depends on your business’ entity type:

• Sole proprietors and single-member LLCs: These are typically pass-through entities that report income and expenses on Schedule C of their personal Form 1040.
• Corporations: C corps file Form 1120, and S corps use Form 1120-S.
• Form 4562: Use Part VI of Form 4562 to report the amortization of any startup or organizational costs that exceed the initial $5,000 cap.

Throughout the year, it’s important to use a financial stack that can handle the complexities of your business. During tax season, partnering with a tax professional to translate your transaction data into a tax-optimized strategy can help you maximize your deductions and stay out of audit trouble. 

Founders deal with a lot of challenges while starting their businesses, but keeping a pulse on your financial health shouldn’t be one of them. You need a single source of truth that synthesizes all incoming financial data into simple, digestible insights. 

By using a financial stack that helps you track every dollar, you’ll not only be prepared for tax season,  you'll also have the tools and transparency you need to make smarter decisions as your startup scales.

Ready to simplify your startup’s finances? Apply for a Mercury account today to access tools that help you track, categorize, and manage your expenses with ease. 

For specific guidance on your tax filing obligations, please consult with a qualified tax professional. Mercury does not provide tax advice. Tax regulations can be complex and vary based on individual circumstances, so it's important to seek personalized advice from an expert who can assess your unique situation.