| A new business owner incurs start-up costs | | | | start-up costs are $55,000 or more, the |
| before beginning the business. Under Section | | | | taxpayer may not deduct any of the start-up |
| 195(c)(1), start-up costs are costs the | | | | costs in the year the taxpayer begins the |
| taxpayer incurs to investigate the creation | | | | active conduct of the business except as an |
| or acquisition of a business or in creating a | | | | amortization deduction as explained below.The |
| business. The costs must be costs that would | | | | taxpayer may deduct the remaining start-up |
| be deductible as an ordinary and necessary | | | | costs ratably over 180 months beginning in |
| business expense if the taxpayer was actively | | | | the month in which the taxpayer begins the |
| conducting the business.In general, a | | | | active conduct of the business under Section |
| taxpayer may not deduct start-up costs until | | | | 195(b)(2). For example assume that a |
| the taxpayer sells the business. That is the | | | | taxpayer's start-up costs were $23,000. The |
| default rule of Section 195(a). However, for | | | | taxpayer may deduct $5,000 immediately. In |
| start-up costs paid or incurred after October | | | | addition, the taxpayer deducts the remaining |
| 22, 2004, a taxpayer may elect to deduct | | | | $18,000 of start-up costs at the rate of $100 |
| start-up costs to the extent allowed by | | | | a month [($23,000 - $5,000) / 180].The |
| Section 195(b)(1)(A). Under Section | | | | ratable deduction of start-up costs over 180 |
| 195(d)(1), a taxpayer has until the due date | | | | months is called an amortization deduction. |
| of the tax return, including extensions, to | | | | A taxpayer claims an amortization deduction |
| make the election.A taxpayer makes the | | | | on Form 4562 and then carries the total |
| election by claiming the deduction on the | | | | deductions on Form 4562 to the appropriate |
| appropriate form. For example, a taxpayer | | | | form.If the taxpayer sells the business |
| who is a sole proprietor would claim the | | | | before deducting all of the start-up costs, |
| deduction on Schedule C of Form 1040. The | | | | the taxpayer may deduct the remaining |
| taxpayer should attach a statement to the | | | | start-up costs as a loss as allowed by |
| form showing the start-up costs for which the | | | | Sections 165 and 195(b)(2).A taxpayer should |
| taxpayer is making the election.If a taxpayer | | | | take advantage of these rules to ensure the |
| failed to make the election when the taxpayer | | | | highest possible tax deductions. Because the |
| filed a timely tax return, the taxpayer has | | | | time for making the election is quite |
| six months to file an amended return and make | | | | limited, a taxpayer should be sure to make |
| the election under Regulations Section | | | | the election in a timely manner.Alan D. |
| 301.9100-2(b). The IRS has no authority for | | | | Campbell is a CPA in Arkansas and Florida and |
| allowing any other late elections.If the | | | | is self-employed primarily as an author of |
| taxpayer elects to deduct start-up costs, the | | | | tax publications. He earned a Ph.D. in |
| taxpayer may deduct up to $5,000 of startup | | | | accounting with an emphasis in taxation from |
| costs in the year the taxpayer begins the | | | | the University of North Texas. He is also |
| active conduct of the business. However, if | | | | admitted to practice before the United States |
| the start-up costs exceed $50,000, the $5,000 | | | | Tax Court. He has published numerous articles |
| limit on the deduction for start-up costs is | | | | on tax topics in professional journals. He is |
| reduced by the amount by which start-up costs | | | | the co-author of the book Tax Strategies for |
| exceed $50,000.For example, assume that the | | | | the Self-Employed and the revision editor of |
| start-up costs are $52,000. The taxpayer may | | | | CCH Financial and Estate Planning Guide, 15th |
| claim an immediate deduction of $3,000 | | | | edition. |
| [$5,000 - ($52,000 - $50,000)]. If the | | | | |