When new businesses are formed various expenses are incurred to establish the business. These start up expenses may be eligible for an expense election and/or may be amortized under applicable federal income tax rules. The following provides an overview of the primary rules in this area of tax law.
To qualify as a start up expenditure eligible for the expense election treatment the expense must be paid or incurred in connection with
In addition, the expense must be a cost that would be allowable as a deduction if it were paid or incurred in connection with an existing active business in the same field as that entered into by the taxpayer.
Start-up costs include amounts paid for the following:
Start-up costs do not include deductible interest, taxes, or research and experimental costs.
Start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. These are costs that help you decide whether to purchase a business. Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize.
Before 2010, taxpayers who paid or incurred start up costs and who subsequently enter the trade or business could have elected to expense up to $5,000 of start up costs.
Special Rule: For 2010 only, taxpayers can elect to deduct up to $10,000 of business start-up costs paid or incurred.
After 2010, the limit returned to $5,000.
Before and after 2010, the $5,000 deduction amount is reduced dollar for dollar when the start up expenses exceed $50,000. So if total start up expenses reach $55,000 then none of the start up costs are eligible for the $5,000 write-off election. Such costs must be amortized.
Special Rule For 2010: For 2010 only, the $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. So if start up expenses reach $70,000, then none of the start up costs can be writtent off and all must be amortized. After 2010, the ceiling reverts to $50,000.
In any event, any remaining costs that can not be written off must be amortized.
The balance of the start up expenses, if any, are to be amortized over a period not less than 180 months, starting with the month in which the business begins.
The election must be made no later than the date (including extensions) for filing the return for the tax year in which the business begins or is acquired. You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins.
However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write “Filed pursuant to section 301.9100-2.” File the amended return at the same address you filed the original return.
Remember that the election applies when computing taxable income for the current tax year and all subsequent years.
The election is made by completing Part VI of Form 4562, Depreciation and Amortization. A taxpayer who does not make the election must capitalize these start up expenses.
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