Business organizational costs are amounts paid, or incurred, to create a corporation or partnership business entity. Start-up costs are those paid or incurred for investigating or creating an “active” trade or business. Start-up and organizational cost include:
- Analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Expenses incurred while investigating the purchase of a business.
- Training wages for employees who will work in the business.
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
- Cost of professional services, such as executives and consultants.
- Legal fees incident to the organization
- Accounting fees incident to the organization
- Filing fees.
If you need a template to track your startup or organizational cost prior to deducting them, use this one from the fine folks over at Score.com.
Unlike expenses incurred as part of the normal ongoing operations of a business, one must “elect” to amortize (i.e. deducted over a period of time) organizational and start up cost in order for them to be deducted. The current rules allow for the following:
- You are able to deduct up to $5,000 of your qualifying start-up costs in the first year.
- The first-year deduction starts to phase-out $1 for $1 when your expenses reach $50,000. Once your expeneses reach or exceed $55,000, the first year deduction is fully phased out.
- Up to $55,000 of start-up expenditures can be deducted ratably over a 180-month period beginning with the month in which the active trade or business begins.
To aid in understanding how the above works, here is how you would make your first year deduction:
If start-up costs are $52,000, $3,000 can be deducted in the first year. You can amortize the remaining start-up costs over 180 months starting with the month business begins.
Making the Election Electing the deduction.
The election to currently deduct up to $5,000 of start-up or organizational costs (or both) is made by claiming the deduction on the tax return for the tax year in which the trade or business begins. Note that the tax return must be timely-filed, including extensions. Furthermore, no separate statement is required for making this election.
Electing to amortize.
The election to amortize start-up or organizational costs (or both) is made by filing Form 4562, Depreciation and Amortization, and completing Part VI. Make sure that you:
- Attach a statement listing a description and amount of each cost, date incurred (for organizational costs), month the business began or was acquired, and the amortization period (generally 180 months).
- Use separate statements for start-up costs and organizational costs.
Correcting an omitted election.
An election to deduct or amortize costs that was omitted on a timely-filed return (including extensions) can still be made by filing an Amended Return within six months of the original due date of the return (excluding extensions).