Starting up a New Business??
Special Tax Treatment for your expenses!
Business Start-Up Costs
Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business.
Qualifying costs. A start-up cost is amortizable if it meets both the following tests.
- It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).
- It is a cost you pay or incur before the day your active trade or business begins.
Start-up costs include amounts paid for the following:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business.
- Salaries and wages for employees who are being trained and their instructors.
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
- Salaries and fees for executives and consultants, or for similar professional services.
Non-qualifying costs. Start-up costs do not include deductible interest, taxes, or research and experimental costs. See Research and Experimental Costs, later.
Costs of Organizing a Corporation
Amounts paid to organize a corporation are the direct costs of creating the corporation.
Qualifying costs. To qualify as an organizational cost it must be:
- For the creation of the corporation,
- Chargeable to a capital account,
- Amortized over the life of the corporation if the corporation had a fixed life, and
- Incurred before the end of the first tax year in which the corporation is in business.
A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year.
Examples of organizational costs include:
- The cost of temporary directors.
- The cost of organizational meetings.
- State incorporation fees.
- The cost of legal services.
Non-qualifying costs. The following items are capital expenses that cannot be amortized:
- Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs.
- Costs associated with the transfer of assets to the corporation.
Costs of Organizing a Partnership
The costs to organize a partnership are the direct costs of creating the partnership.
Qualifying costs. You can amortize an organizational cost only if it meets all the following tests.
- It is for the creation of the partnership and not for starting or operating the partnership trade or business.
- It is chargeable to a capital account.
- It could be amortized over the life of the partnership if the partnership had a fixed life.
- It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later.
- It is for a type of item normally expected to benefit the partnership throughout its entire life.
Organizational costs include the following fees.
- Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.
- Accounting fees for services incident to the organization of the partnership.
- Filing fees.
Non-qualifying costs. The following costs cannot be amortized.
- The cost of acquiring assets for the partnership or transferring assets to the partnership.
- The cost of admitting or removing partners, other than at the time the partnership is first organized.
- The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership.
- The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. These “syndication fees” are capital expenses that cannot be depreciated or amortized.
How to make the election.
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. The election applies when computing taxable income for the current tax year and all subsequent years.