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. See Capital Expenses in chapter 1 for a discussion on how to treat these costs if you do not go into 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. Once made, the election is irrevocable. See Temporary Regulations sections 1.195-1T, 1.248-1T, and 1.709-1T.
For costs paid after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. If the election is made, you must attach any statement required by Regulations sections 1.195-1(b), 1.248-1(c), and 1.709-1(c). However, you can apply the provisions of Temporary Regulations sections 1.195-1T, 1.248-1T, and 1.709-1T to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Otherwise the provisions under Regulations section 1.195-1(b), 1.248-1(c), and 1.709-1(c) will apply.
For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. See How To Make the Election later.
The cost must qualify as one of the following.
- A business start-up cost.
- An organizational cost for a corporation.
- An organizational cost for a partnership.
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. taxmap/pubs/p535-041.htm#en_us_publink1000158841
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.
Start-up costs do not include deductible interest, taxes, or research and experimental costs. See Research and Experimental Costs, later. taxmap/pubs/p535-041.htm#en_us_publink1000158843
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.taxmap/pubs/p535-041.htm#en_us_publink1000158844
On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. The letter stated that a binding commitment would result only after a purchase agreement was signed. The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. On October 22nd, you signed a purchase agreement with XYZ, Inc.
All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. taxmap/pubs/p535-041.htm#en_us_publink1000158845
If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. taxmap/pubs/p535-041.htm#en_us_publink1000158846
Amounts paid to organize a corporation are the direct costs of creating the corporation.taxmap/pubs/p535-041.htm#en_us_publink1000158847
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.
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.
The costs to organize a partnership are the direct costs of creating the partnership.taxmap/pubs/p535-041.htm#en_us_publink1000158850
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.
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.
If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. However, these costs can be deducted only to the extent they qualify as a loss from a business. taxmap/pubs/p535-041.htm#en_us_publink1000158853
Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Once you choose an amortization period, you cannot change it.
To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month. taxmap/pubs/p535-041.htm#en_us_publink1000158854
A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. taxmap/pubs/p535-041.htm#en_us_publink1000158855
To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 and an accompanying statement (explained later) to your return for the first tax year you are in business. If you have both start-up and organizational costs, attach a separate statement to your return for each type of cost.
Generally, you must file the return by the due date (including any extensions). 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). For more information, see the instructions for Part VI of Form 4562.
Once you make the election to amortize start-up or organizational costs, you cannot revoke it.
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. taxmap/pubs/p535-041.htm#en_us_publink1000158856
If you elect to amortize your start-up costs, attach a separate statement that contains the following information.
- A description of the business to which the start-up costs relate.
- A description of each start-up cost incurred.
- The month your active business began (or was acquired).
- The number of months in your amortization period (which is generally 180 months).
You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. If you file the statement early, the election becomes effective in the month of the tax year your active business begins. taxmap/pubs/p535-041.htm#en_us_publink1000158858
You can file a revised statement to include any start-up costs not included in your original statement. However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. taxmap/pubs/p535-041.htm#en_us_publink1000158859
If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement that contains the following information.
- A description of each cost.
- The amount of each cost.
- The date each cost was incurred.
- The month your corporation or partnership began active business (or acquired the business).
- The number of months in your amortization period (which is generally 180 months).
The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost.
You do not need to separately list any partnership organizational cost that is less than $10. Instead, you can list the total amount of these costs with the dates the first and last costs were incurred.
After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement.