Tax Treatment of Business Start-up and Organization Costs

Tax Treatment of Business Start-up and Organization Costs

Ready to start your business? Be prepared to follow the tax codes from the beginning and not get yourself into hot water. Here are the details you must know from the start.

tax treatment for startupsWhen you go into what is expected to be a profit-making business, Business Start-up and Organization costs generally must be treated as capital expenditures. You can choose to deduct up to $5,000 of business Start-up costs and $5,000 of Organization costs as a current business expense. The $5,000 deduction is reduced by the amount your total Start-up or Organization cost exceeds $50,000. Start up and Organization costs above these thresholds must be amortized (deducted equally) over 180 months, beginning with the month you begin business operations.

Special rule for 2010 start-up costs. For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.

Note: If you elect not to amortize these costs, they cannot be recovered until you either sell the business or go out of business.

Start-up Costs:

To be amortizable, a start-up cost must be a cost that would be deductible if it were paid to operate an existing business (in the same field as the one you entered into), and it must be paid or incurred before the day your active trade or business begins. Amortizable start-up costs include:

  • An analysis or survey of potential markets, products, labor supply, transportation, facilities, etc .
  • Advertisements to open the business.
  • Salaries and wages for employees being trained, and for their instructors.
  • Travel or other expenses to secure prospective distributors, suppliers, or customers.
  • Salaries and fees for executives and consultants or for other professional services such as accounting or legal assistance.

    Note: Start-up costs do not include deductible interest, taxes or R&D.

Organizational costs for a corporation are the direct costs of creating a corporation. They include the cost of temporary directors, organizational meetings, incorporation fees and legal costs. Not included are costs to sell stocks or securities, such as commissions, professional fees and printing costs. Costs connected with the transfer of assets to the corporation are also not included.

Costs are amortizable if incurred before the end of the first tax year in which the corporation is business. If using the cash accounting method, corporations may amortize organizational costs incurred within the first tax year even if it does not pay for them in that year.

Organizational costs for a partnership and LLC are the direct costs of creating a partnership or LLC. They are similar to corporation organizational costs. In order to amortize these costs, you must complete IRS Form 4562 and attach it to your federal income tax return.

For a more complete description of Start-up/Organization costs and their treatment, see IRS Publications:

535 – Business Expenses for 2014 Returns

541 – Partnerships Revised: December 2010

542 – Corporations Revised: 2/2006

The bottom-line make certain you keep good records from the start and your accountant can help you determine what qualifies as start-up costs. If you need assistance with your Start-Up request a SCORE counselor they can give you direction in every phase of your business at no cost to you, please click here.

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