Taxpayers incurring startup costs under IRC §195 can elect to deduct up to $5,000 in the year the business starts.  If the total startup costs exceed $50,000, this $5,000 limit is reduced dollar for dollar.  Any startup costs in excess of the elected amount can be amortized using a straight-line method over a period of 15 years on a monthly basis if the taxpayer elects such.  If no election is made, the startup costs are capitalized and sit on the books until the entity terminates.

 

Taxpayers incurring organization expenses under IRC §709 (partnerships) or IRC §248 (corporations) can elect to deduct up to $5,000 in the year the business starts.  If the total organization expenses exceed $50,000, this $5,000 limit is reduced dollar for dollar.  Any organization expenses in excess of the elected amount can be amortized using a straight-line method over a period of 15 years on a monthly basis if the taxpayer elects such.  If no election is made, the organization expenses are capitalized and sit on the books until the entity terminates.

 

Until recently the election to deduct and/or amortize startup costs and organization expenses was made by attaching a statement to the tax return identifying the costs and formally making the election.

 

Now IRS has released new regulations regarding this election.  The new regulations state the taxpayer makes the election by merely deducting the expenses (subject to the limitations mentioned above) on the tax return for the first year the business starts.  There is not a formal statement required.

 

In the event of an audit, taxpayers still need to be able to show the items that make up the startup costs and organization expenses as well as the amount deducted on the return (to verify the proper limits have been applied.

 

TD 9411 contains the new regulations 1.195-1T, 1.709-1T, and 1.248-T.