diff --git a/kai/test_kai_logging.py b/kai/test_kai_logging.py
new file mode 100644
index 00000000..09351462
--- /dev/null
+++ b/kai/test_kai_logging.py
@@ -0,0 +1,116 @@
+import logging
+import os
+import shutil
+import tempfile
+import unittest
+from unittest.mock import MagicMock, patch
+
+from kai.kai_logging import (
+    initLogging,
+    initLoggingFromConfig,
+    process_log_dir_replacements,
+    setup_console_handler,
+    setup_file_handler,
+)
+from kai.models.kai_config import KaiConfig, KaiConfigIncidentStore, KaiConfigModels
+
+
+class TestLoggingSetup(unittest.TestCase):
+    def setUp(self):
+        self.test_log_dir = tempfile.mkdtemp()
+        self.console_log_level = "INFO"
+        self.file_log_level = "DEBUG"
+        self.log_file = "kai_server.log"
+        self.log_dir_with_placeholder = "$pwd/logs"
+
+        # Mock KaiConfig
+        self.config = MagicMock(spec=KaiConfig)
+        self.config.log_level = self.console_log_level
+        self.config.file_log_level = self.file_log_level
+        self.config.log_dir = self.log_dir_with_placeholder
+        self.config.incident_store = MagicMock(spec=KaiConfigIncidentStore)
+        self.config.models = KaiConfigModels(
+            provider="FakeProvider",
+            args={},
+        )
+        self.config.solution_consumers = []
+
+    def tearDown(self):
+        shutil.rmtree(self.test_log_dir)
+
+    @patch("os.getcwd")
+    def test_process_log_dir_replacements(self, mock_getcwd):
+        mock_cwd = os.path.dirname(os.path.abspath(__file__))
+        mock_getcwd.return_value = mock_cwd
+        actual_log_dir = process_log_dir_replacements(self.config.log_dir)
+        expected_log_dir = os.path.abspath(os.path.join(mock_cwd, "logs"))
+        self.assertEqual(expected_log_dir, actual_log_dir)
+
+    @patch("logging.StreamHandler")
+    def test_setup_console_handler(self, mock_stream_handler):
+        logger = logging.getLogger("test_console_logger")
+        setup_console_handler(logger, self.console_log_level)
+        mock_stream_handler.assert_called_once()
+        handler_instance = mock_stream_handler.return_value
+        handler_instance.setLevel.assert_called_once_with(self.console_log_level)
+        handler_instance.setFormatter.assert_called_once()
+
+    @patch("logging.FileHandler")
+    @patch("os.makedirs")
+    def test_setup_file_handler(self, mock_makedirs, mock_file_handler):
+        logger = logging.getLogger("test_file_logger")
+        setup_file_handler(
+            logger, self.log_file, self.log_dir_with_placeholder, self.file_log_level
+        )
+        expected_log_dir = process_log_dir_replacements(self.log_dir_with_placeholder)
+        mock_makedirs.assert_called_once_with(expected_log_dir, exist_ok=True)
+        expected_log_file_path = os.path.join(expected_log_dir, self.log_file)
+        mock_file_handler.assert_called_once_with(expected_log_file_path)
+        handler_instance = mock_file_handler.return_value
+        handler_instance.setLevel.assert_called_once_with(self.file_log_level)
+        handler_instance.setFormatter.assert_called_once()
+
+    def test_init_logging(self):
+        initLogging(
+            self.console_log_level,
+            self.file_log_level,
+            self.test_log_dir,
+            self.log_file,
+        )
+        logger = logging.getLogger("kai")
+        self.assertEqual(logger.level, logging.DEBUG)
+        self.assertTrue(
+            any(
+                isinstance(handler, logging.StreamHandler)
+                for handler in logger.handlers
+            )
+        )
+        self.assertTrue(
+            any(isinstance(handler, logging.FileHandler) for handler in logger.handlers)
+        )
+
+    @patch("os.makedirs")
+    @patch("os.getcwd")
+    def test_init_logging_from_config(self, mock_getcwd, mock_makedirs):
+        base_dir = os.path.dirname(os.path.dirname(os.path.abspath(__file__)))
+        mock_getcwd.return_value = base_dir
+        expected_log_dir = os.path.join(base_dir, "logs")
+        initLoggingFromConfig(self.config)
+
+        mock_makedirs.assert_called_once_with(expected_log_dir, exist_ok=True)
+
+        logger = logging.getLogger("kai")
+        self.assertEqual(logger.level, logging.DEBUG)
+        self.assertTrue(
+            any(
+                isinstance(handler, logging.StreamHandler)
+                for handler in logger.handlers
+            )
+        )
+        self.assertTrue(
+            any(isinstance(handler, logging.FileHandler) for handler in logger.handlers)
+        )
+
+
+if __name__ == "__main__":
+    unittest.main()