For federal tax purposes, a business starts on the date it is ready to perform the activities it was organized to do — not the day you had the idea, filed formation papers, or made your first sale. This is the going-concern test, and it is what the IRS uses to decide when a business starts for tax purposes. The date matters because it controls when ordinary operating expenses become deductible, when start-up costs begin amortizing, and how everything you spent before that day is classified on your return.
The Readiness Standard the IRS Applies
The controlling case is Richmond Television Corp. v. United States, which held that a taxpayer has not “engaged in carrying on any trade or business” until the business has “begun to function as a going concern and performed those activities for which it was organized.”1Justia Law. Richmond Television Corporation v. United States of America In that case a television company had spent years and significant money preparing to broadcast, but the court ruled it was not in business until it obtained its license and went on the air. The decision to enter business, however firm, was not enough.
The IRS applies the same principle as a readiness test. According to IRS Publication 535, a business does not start merely because the owner is investigating opportunities, scouting locations, or searching for customers.2Internal Revenue Service. Publication 535 (2022), Business Expenses The business must be in a state where it can actually deliver the goods or services it exists to provide.
You do not need to have closed your first sale. If your storefront is open, your equipment is in place, and you are actively ready to serve customers, that is generally sufficient. The test is operational readiness, not revenue. A restaurant that has hired staff, stocked the kitchen, and posted its hours is in business even if no customer has walked in yet. A consulting firm with a signed office lease and active marketing is in business before the first client engagement.
Courts treat this as a factual question, not a bright line. There is no universal checklist, which is why the specific evidence you keep about that date matters so much.
Why the Start Date Matters
Every dollar you spend before the business passes the going-concern test falls into a different tax category than ordinary operating expenses. Section 195 of the Internal Revenue Code governs these start-up costs, which include expenses for investigating a potential business, training employees before opening day, advertising ahead of launch, and similar pre-operational spending.3Office of the Law Revision Counsel. 26 USC 195 – Start-up Expenditures The defining feature is that these costs would have been ordinary deductible expenses if the business had already been operating.
The default rule is that start-up costs must be capitalized. However, Section 195 allows a deduction of up to $5,000 in the year the business begins, as long as total start-up costs stay at or below $50,000. That $5,000 allowance phases out dollar for dollar once total costs exceed $50,000, disappearing entirely at $55,000. Any balance beyond what you deduct in the first year is amortized evenly over 180 months, starting with the month the business begins.3Office of the Law Revision Counsel. 26 USC 195 – Start-up Expenditures
You do not need to file a separate election to claim this deduction. Under the Treasury regulations, you are deemed to have made the Section 195 election automatically in the year your business begins.4eCFR. 26 CFR 1.195-1 – Election to Amortize Start-up Expenditures If you want to forgo the deduction and capitalize everything, you must affirmatively elect to do so on a timely filed return. The favorable treatment is the default, but only if you accurately track those costs and correctly report the business start date.
Everything hinges on that date. Spend money on the wrong side of it and it is either a start-up cost caught in the amortization schedule or, if you never open, potentially unrecoverable in the ordinary sense. Spend it on the right side and it is deductible in the year paid or incurred.
Organizational Costs Follow the Same Trigger
Organizational costs — the legal and administrative fees to formally create the entity itself — track a parallel structure and use the same start-of-business trigger. For corporations, Section 248 allows a deduction of up to $5,000 in the year the corporation begins business, with the same phase-out above $50,000 and 180-month amortization for the remainder.5Office of the Law Revision Counsel. 26 USC 248 – Organizational Expenditures Qualifying items include legal fees for drafting the charter, accounting fees during the organizational period, and state incorporation fees.
For partnerships, Section 709 provides equivalent rules with identical dollar thresholds: up to $5,000 deductible in the first year (phasing out above $50,000 total), with the remainder spread over 180 months. One trap catches partnerships specifically: syndication costs (marketing materials to attract investors, brokerage fees, placement commissions) are permanently non-deductible under Section 709, with no amortization period and no recovery until the partnership terminates.6Office of the Law Revision Counsel. 26 USC 709 – Treatment of Organization and Syndication Fees
Keep organizational costs and start-up costs in separate categories on your books. The dollar limits apply independently to each, so mixing them can cost you deductions.
How Entity Type Affects the Markers
The going-concern test controls for federal tax purposes regardless of entity type, but different structures produce different milestones you might confuse with the start date.
Corporations and LLCs have a formal moment of legal existence: the date the state accepts your articles of incorporation or articles of organization. That filing creates the entity, but it does not necessarily start the business for tax purposes. A corporation that files in January but spends six months building out its operations before opening is likely not in business until the doors open. The state formation date is a milestone. The IRS still looks for operational readiness.
Sole proprietorships have no state formation requirement. There is no articles filing, no certificate of organization. The business start date depends entirely on when you began the activity the IRS considers an active trade or business — acquiring necessary licenses, actively marketing services, or performing work for clients. Careful record-keeping matters more here because there is no government-stamped document to anchor the date.
Partnerships fall in between. Filing a partnership agreement or a state registration creates a legal relationship, but as with corporations, the IRS focuses on when the partnership actually begins conducting its trade or business. Partners should agree on the start date and document it consistently across all filings.
How to Document Your Start Date
If the IRS questions your start date, you bear the burden of proving it. The Richmond Television court made clear that the determination “must have an evidentiary basis.”1Justia Law. Richmond Television Corporation v. United States of America Assemble the paper trail before you need it.
Useful documentation includes signed lease agreements, professional licenses and local permits, vendor contracts, advertising receipts showing the date you began marketing, and the opening statement from your business bank account. Accounting records should clearly show the first revenue-generating transaction or, if revenue came later, the first date the business was open and ready to operate.
Form SS-4, the application for an Employer Identification Number, asks specifically on Line 11 for the date the business started or was acquired.7Internal Revenue Service. Form SS-4 (Rev. December 2025) – Application for Employer Identification Number The instructions direct new businesses to enter the starting date of operations.8Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025) This date should match your other records. If the date on your EIN application says March but your first return claims start-up amortization beginning in January, that inconsistency invites scrutiny. Pick the date the evidence actually supports, then use it everywhere.
If the Business Never Opens
Not every venture makes it past the investigation stage, and that changes the answer to when — or whether — a business starts for tax purposes. Section 195 only allows start-up cost deductions and amortization “in the taxable year in which the active trade or business begins.”3Office of the Law Revision Counsel. 26 USC 195 – Start-up Expenditures If the business never begins, that trigger never fires, and you cannot amortize those costs over 180 months.
Money spent investigating a failed venture may instead be recoverable as a loss under Section 165, which allows individuals to deduct losses from transactions entered into for profit even when not connected to an ongoing business.9Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses The practical difference is significant. A capital loss is subject to annual deduction limits (generally $3,000 against ordinary income for individuals), while amortizable start-up costs produce steady deductions over 15 years once the business begins. The earlier you recognize that a venture will not launch, the sooner you can stop accumulating costs that receive less favorable treatment.