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Start-up Costs - How to Deduct Them

A new business owner incurs start-up$50,000)]. If the start-up costs are
costs before beginning the business.$55,000 or more, the taxpayer may not
Under Section 195(c)(1), start-up costsdeduct any of the start-up costs in the
are costs the taxpayer incurs toyear the taxpayer begins the active
investigate the creation or acquisitionconduct of the business except as an
of a business or in creating a business.amortization deduction as explained
The costs must be costs that would bebelow.The taxpayer may deduct the
deductible as an ordinary and necessaryremaining start-up costs ratably over
business expense if the taxpayer was180 months beginning in the month in
actively conducting the business.Inwhich the taxpayer begins the active
general, a taxpayer may not deductconduct of the business under Section
start-up costs until the taxpayer sells195(b)(2). For example assume that a
the business. That is the default ruletaxpayer's start-up costs were $23,000.
of Section 195(a). However, forThe taxpayer may deduct $5,000
start-up costs paid or incurred afterimmediately. In addition, the taxpayer
October 22, 2004, a taxpayer may electdeducts the remaining $18,000 of
to deduct start-up costs to the extentstart-up costs at the rate of $100 a
allowed by Section 195(b)(1)(A). Undermonth [($23,000 - $5,000) / 180].The
Section 195(d)(1), a taxpayer has untilratable deduction of start-up costs over
the due date of the tax return,180 months is called an amortization
including extensions, to make thededuction. A taxpayer claims an
election.A taxpayer makes the electionamortization deduction on Form 4562 and
by claiming the deduction on thethen carries the total deductions on
appropriate form. For example, aForm 4562 to the appropriate form.If the
taxpayer who is a sole proprietor wouldtaxpayer sells the business before
claim the deduction on Schedule C ofdeducting all of the start-up costs, the
Form 1040. The taxpayer should attach ataxpayer may deduct the remaining
statement to the form showing thestart-up costs as a loss as allowed by
start-up costs for which the taxpayer isSections 165 and 195(b)(2).A taxpayer
making the election.If a taxpayer failedshould take advantage of these rules to
to make the election when the taxpayerensure the highest possible tax
filed a timely tax return, the taxpayerdeductions. Because the time for making
has six months to file an amended returnthe election is quite limited, a
and make the election under Regulationstaxpayer should be sure to make the
Section 301.9100-2(b). The IRS has noelection in a timely manner.Alan D.
authority for allowing any other lateCampbell is a CPA in Arkansas and
elections.If the taxpayer elects toFlorida and is self-employed primarily
deduct start-up costs, the taxpayer mayas an author of tax publications. He
deduct up to $5,000 of startup costs inearned a Ph.D. in accounting with an
the year the taxpayer begins the activeemphasis in taxation from the University
conduct of the business. However, ifof North Texas. He is also admitted to
the start-up costs exceed $50,000, thepractice before the United States Tax
$5,000 limit on the deduction forCourt. He has published numerous
start-up costs is reduced by the amountarticles on tax topics in professional
by which start-up costs exceedjournals. He is the co-author of the
$50,000.For example, assume that thebook Tax Strategies for the
start-up costs are $52,000. TheSelf-Employed and the revision editor of
taxpayer may claim an immediateCCH Financial and Estate Planning Guide,
deduction of $3,000 [$5,000 - ($52,000 -15th edition.



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