IRC 195: Good tax policy or simply a revenue raiser

The public policy goal of Section 195 is to help small business.

Prior to the enactment of Section 195, the IRS took the position (which courts upheld) that start-up costs were not deductible because businesses did not exist when they were incurred. Instead, those costs were required to be capitalized, or added to a founder's basis in a business. Therefore, a founder would only recover the start-up costs when selling a business (by deducting them from the proceeds of the sale). Businesses that were never sold (either because they were passed within a family, or because they failed) received no tax benefit from their start-up costs.

The Miscellaneous Revenue Act of 1980 (P.L. 96-605) enacted the first version of Section 195. Under this version, all start-up costs were to be amortized over 60 months (five years). In explaining the change, the Senate Committee on Finance identified the potential to "encourage formation of new businesses and decrease controversy and litigation arising under present law" (S. Rept. 96-1036, p. 11).

The American Jobs Creation Act of 2004 (P.L. 108-357) changed the universal five-year amortization for Section 195 (and Sections 248 and 709) to the current $5,000 deduction in the first year, and amounts over that (or all amounts, for businesses past the phaseout) amortized over 180 months (15 years). In proposing the change, the Senate Committee on Finance stated that "allowing a fixed amount of start-up and organizational expenditures to be deductible, rather than requiring their amortization, may help encourage the formation of new businesses that do not require significant start-up or organizational costs to be incurred." Extending the previous 5-year deduction period to 15 years was intended to provide "a consistent amortization period" with Section 197 intangibles.

https://www.congress.gov/crs-product/IF12970?s=1&r=1