Monday, January 15, 2007

START-UP COSTS - AMORTIZING AND WRITE-OFFS

-COSTS ELIGIBLE FOR AMORTIZATION:
If a business cost would be eligible for a charge-off to expense rather than a capital expenditure, if incurred in an existing business, it is eligible for amortization if incurred as a start-up cost prior to to the date business commences. Equipment, computer software and other tangible assets are NOT amortizable.
Start-up costs include the following:

  • Survey of potential markets, products, transportation facilities.
  • Advertising for the opening of the business before it begins.
  • Travel to secure customers and suppliers
  • Professional fees in connection with setting up the business
In the year the business begins, up to $5,000 of amortizable start-off costs can be written off as a current deduction. Any remaining costs can be amortized over 180-months.

UNAMORTIZED START-UP COSTS:
If costs are not amortizable they must be recovered either through depreciation, depletion, or cost of goods sold--or capitalized and recoverable only when the business is sold.

YOU MUST MAKE AN ELECTION TO AMORTIZE
You must submit a statement if you want to amortize rather than capitalize qualifying start-up costs. The statement should state:

This businss/partnership/corporation hereby elects under Section____ (enter Section Number) to amortize its start-up expenses over a period of 180 months for expenditures incurred in starting the business which began on __________(enter date).

IRS SECTION NUMBER TO CITE:
Partnership……….…..§ 709
Corporation………...…§ 248
Other Businesses……§ 195
LINKS and References – go to
IRS References
To Contact me taxxcpa2007@hotmail.com

Here are the IRS Instructions:
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.

For more information about amortizing start-up and organizational costs, see chapter 9 in Publication 535.


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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

15 comments:

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What happens with the amortization if the business fails within the 180 months. Is it a capital loss? Please refer me to the Code for a specific answer.

Thanks

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