| Business Expenses / Amortization of start-up and organization expenses |  |
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If you've recently started a
business, or if you're in the process of starting one now, you should be
aware that the way you treat some of your initial expenses for tax
purposes can make a big difference in your tax bill. Generally, expenses incurred before
a business begins don't generate any deductions or other current tax
benefits. However, taxpayers, whether they are
individuals, corporations or partnerships, are permitted to elect to
write off "start-up expenses" over a period of 60 months or
more that begins with the actual start of the business. (A write-off
period of more than 60-months might be attractive to some taxpayers, for
example, taxpayers with expiring net operating losses). Start-up
expenses include, with a few exceptions, all expenses incurred to
investigate the creation or acquisition of a business, to actually
create the business, or to engage in a for-profit activity in
anticipation of that activity becoming an active business. To be
eligible for the election, an expense also must be one that would be
deductible if it were incurred after the business actually began. An
example of a start-up expense is the cost of analyzing the potential
market for a new product. A similar 60-month-or-more-write-off
election is available, to corporations and partnerships, for their
"organization expenses." To qualify as an organization
expense, the expense must be incident to the creation of the corporation
or partnership, be an expense that, in the absence of the election,
would be capitalized, and be an expense that, if it had been incurred in
connection with a corporation or partnership that had a limited life,
would have been eligible to have been written off over that limited
life. Examples of organization expenses are legal and accounting fees
for services related to organizing the new entity (such as fees for
drafting the corporate charter or partnership agreement) and filing fees
(such as fees paid to the state of incorporation). As you can see, it's important to keep a record of these start-up and organization expenses and, where called for, to make the appropriate 60-month-or-more-write-off election. As mentioned above, if an election isn't made, there is no current tax benefit derived from the eligible expenses covered by the election. Also, you should be aware that in each instance, an election requires the filing of detailed statements and, once made, is irrevocable. |
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