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Start-up Costs - How to Deduct Them

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




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