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.
Purchasing an Active Trade or Business
Amortizable 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.
Costs of Organizing a Corporation
Amounts paid to organize a corporation are the direct costs of creating the corporation. 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 has a fixed life) and the cost(s) must have been 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 legal services, State incorporation fees, the cost of organizational meetings and the cost of temporary directors.
Costs of Organizing a Partnership
The costs to organize a partnership are the direct costs of creating the partnership. A partnership can amortize an organizational cost only if it meets all the following tests:
- It is for a type of item normally expected to benefit the partnership throughout its entire 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.
- It could be amortized over the life of the partnership if the partnership had a fixed life.
- It is chargeable to a capital account.
- It is for the creation of the partnership and not for starting or operating the partnership trade or business.
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.
The following partnership costs CANNOT be amortized:
- 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.
- 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 cost of admitting or removing partners, other than at the time the partnership is first organized.
- The cost of acquiring assets for the partnership or transferring assets to the partnership.
When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Generally, you recover costs for particular assets through depreciation deductions. However, you generally cannot recover other costs until you sell the business or otherwise go out of business.
For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. The costs that are not deducted currently can be amortized ratably over a 180-month period. The amortization period starts with the month you begin operating your active trade or business. You are not required to attach a statement to make this election. You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business, per Regulation sections 1.195-1, 1.248-1, and 1.709-1.
A start-up cost is amortizable if it meets both of the following tests, a) 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), and b) 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.
Start-up costs do not include deductible interest, taxes or research and experimental costs.
The Election to Capitalize or Amortize is Irrevocable.
The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. A shareholder or partner cannot make this election. You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Only the corporation or partnership can amortize these costs.
However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. These costs qualify as business start-up costs if you acquire the partnership interest.