A "start-up" typically incurs significant expenses before actually carrying on business activities. Under subsection (a) of Internal Revenue Code (Code) §162, the deduction of trade or business expenses is limited to "ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business" (emphasis added). Thus, only when a trade or business is being carried on may expenses be deducted under that provision. The prohibition against current deduction of start-up expenditures is also stated explicitly in Code §195, which then goes on to allow an amortization deduction over a 15-year period for such expenditures, beginning when the trade or business is actually commenced.

It is also common for a substantial portion of the expenditures of a start-up, whether incurred before or after business has commenced, to consist of software development costs. Expenditures made to acquire or increase the value of property are, in general, required to be capitalized (see Code §263(a) and Reg. §1.263(a)-1), absent application of a specific Code provision that may allow more favorable tax treatment. One such provision may be Code §174, which allows a deduction for certain research and experimental expenditures.