Every entrepreneur knows the excitement of pursuing a new business opportunity—but not every deal makes it to the finish line. Whether you’re exploring an industry, investigating potential targets, or deep in acquisition negotiations, failed deals can leave you asking an important question:

What happens to all the money you spent?

Let’s break down, in simple terms, how the IRS treats start-up and acquisition expenses when a business purchase doesn’t go as planned.

Jim’s Story: A Real-World Example

Meet Jim, an employee with big entrepreneurial dreams.
He spent:

• $15,000 researching an industry and identifying a business (ADG) he wanted to acquire.

• $35,000 on legal, accounting, and professional fees once the purchase contract was underway.

But ultimately—the deal failed.

So how does Jim treat the $50,000 he spent?

1. The Start-Up Costs: The First $15,000

If Jim had successfully acquired ADG:

• He could deduct $5,000 immediately in the year of acquisition.

• The remaining $10,000 would be amortized over 180 months (15 years).

But because the deal never closed, the business never “started” for tax purposes.

 Result: The $15,000 is considered a personal, non-deductible expense.

However, this cost isn’t necessarily lost forever.

2. Salvaging the $15,000: Enter Business #2 (XYZ)

Jim kept going—he researched another similar company, XYZ, spending an additional $5,000.

Now, something interesting happens.

If XYZ is in the same field as ADG:

• Jim may be able to treat the combined $20,000 as start-up expenses, amortizable over 180 months.

The IRS requires the expenses to be in the same field of trade or business, but surprisingly…
there are no clear rulings defining how similar the businesses must be.

So, if XYZ is reasonably similar to ADG, Jim has a strong chance to recover the earlier costs.

3. Acquisition Costs: The $35,000 Professional Fees

Once Jim decided to formally acquire ADG, the legal, accounting, and related fees became “capitalized acquisition costs.”

But since the acquisition failed, something important happens: 

The $35,000 becomes a short-term capital loss.

This is good news.

How Jim Can Use This Loss

He can deduct:

• Against capital gains, and

• Up to $3,000 annually against ordinary income

…until the entire $35,000 is used up.

This allows him to slowly recover the cost, even though the acquisition collapsed

Key Takeaways for Entrepreneurs & Investors

• Initial investigation costs

Non-deductible if no business is acquired.
But may be recoverable if a similar business is later purchased.

• Later investigation costs

Qualify as start-up expenses.

• Acquisition-related costs

Become short-term capital losses if the deal fails—valuable for future tax planning.

Why This Matters

Failed deals are frustrating—but they don’t have to be financially devastating.
Understanding the difference between:

• Start-up exploration costs

• Investigation expenses

• Acquisition transaction costs

…can save you money and help you structure your next deal more strategically.

For entrepreneurs, tax planners, and small business advisors, knowing these rules ensures that even when opportunities fall apart, your financial planning remains strong.