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.
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. Start up costs that exceed the first-year limit of $5,000 may be amortized ratably over 15 years.
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.
The balance of the start up expenses, if any, are to be amortized over a period not less than 15 years, 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.
To claim the immediate deduction for start up costs, a sole proprietor lists such costs on Part V of Schedule C (Other Expenses).
Any excess amount over the first year limit of $5,000 must be amortized over 15 years (180 months). An election to amortize the excess over $5,000 is made by claiming the deduction on and completing Part VI of Form 4562, Depreciation and Amortization as follows:
A taxpayer who does not make the election to immediately write-off these start up expenses must capitalize these start up expenses.
The same rules for start-up costs discussed previously apply to such costs related to the creation of a corporation or partnership .
Qualifying expenses for a corporation include the following:
You may not deduct costs for stock or securities (i.e. commissions).
Qualifying costs for a partnership include the following:
You may not deduct or amortize syndication costs of issuing and marketing partnership interests, such as brokerage and registration fees, underwriting fees, and costs of preparing a prospectus.
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