AI startup entity choice and asset amortization rules

Quick answer: The documents I have don't cover entity-selection strategy (LLC vs. corporation vs. partnership choice-of-entity advice) or a specific "AI asset" amortization rule — there's no IRS ruling in my sources that names AI models as a category. I can share what the documents do say about partnership basics, general capitalization/amortization rules, and business asset basis, but for the entity decision and any AI-specific guidance, you'll need a CPA.

Entity choice (TX-based, clients in CA/GA)

My documents don't contain entity-selection guidance comparing LLCs, corporations, and partnerships for multi-state service businesses. As general background: an LLC is an entity formed under state law by filing articles of organization, and unlike a partnership, none of the members of an LLC are personally liable for its debts.¹ Also note, a domestic LLC with at least two members that doesn't file Form 8832 is classified as a partnership for federal income tax purposes² by default. Since you have a co-founder, you and your friend would need to decide between default partnership tax treatment or electing corporate treatment — this decision affects self-employment tax, liability, and how CA/GA client revenue is sourced. This is a fact-specific choice-of-entity question a CPA should walk through with you, especially since Texas franchise tax and CA/GA state filing obligations for out-of-state service providers aren't addressed in what I have.

Startup expenses / capitalizing vs. deducting

My documents discuss general capitalization principles rather than a startup-expense-specific list. Two relevant rules:

• Costs you can choose to deduct or capitalize include things like carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules, and research and experimental costs.³
• If you build or develop assets yourselves (e.g., using your own labor/equipment for the AI product), if you own a business and use your employees, material, and equipment to build an asset, don't deduct the following expenses — you must include them in the asset's basis: employee wages paid for the construction work (reduced by employment credits), depreciation on equipment used in construction, operating and maintenance costs for that equipment, and the cost of business supplies and materials used in construction.⁴ Note, though: don't include the value of your own labor, or any other labor you didn't pay for, in the basis of any property you construct.⁵

Also relevant: many small businesses are exempt from the more burdensome uniform capitalization rules. For tax years beginning in 2025, you're not subject to the uniform capitalization rules if your average annual gross receipts are $31 million or less for the 3 preceding tax years and you're not a tax shelter.⁶ With a young company on MRR, you likely qualify for this exception, but confirm current-year thresholds since the average annual gross receipts test threshold amount may be adjusted for inflation, and Publication 551 may not be revised to reflect this amount — for tax years beginning after 2025, see the instructions for your applicable income tax return for the current threshold.⁷

Amortizing "AI assets" — no specific IRS ruling in my documents

My documents do not contain any IRS ruling specifically addressing amortization of AI models or AI-developed software. What is covered:

• Software you purchase or develop that meets certain tests can generally be depreciated: if the software meets the tests, it may also qualify for the section 179 deduction and the special depreciation allowance, and if you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.⁸
• Research and experimental costs related to developing the technology are a cost category you can generally choose to deduct or capitalize, as noted above, or which may be excepted from capitalization rules entirely: research and experimental expenses deductible under section 174 or 174A of the Internal Revenue Code⁹ are not subject to uniform capitalization.
• Patents on an invention (if you patent your AI methodology) have basis equal to the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees — though if you deduct the research and experimental expenditures as current business expenses, you can't include them in the basis of the patent.¹⁰
• Certain acquired intangibles (not self-developed) fall under Section 197 and are amortized over 15 years, per Publication 544, but this generally applies to acquired intangibles like goodwill, patents, and similar items in a business purchase — not self-built AI models.

What it depends on:

• Whether you buy, license, or self-develop the AI model/software
• Whether costs are R&E expenditures under §174 vs. capitalizable software development costs
• Your entity structure and multi-state footprint (CA, GA, TX rules differ)
• Current-year inflation-adjusted thresholds (2025 changed significantly under the OBBBA — confirm current figures)

Given the multi-state clients, co-founder equity questions, and the fact that "AI asset" tax treatment isn't explicitly addressed in official guidance yet, it's well worth sitting down with a CPA to map your specific facts to the current rules.