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