Page 89 - Small Business Taxes

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Qualifying costs. A startup cost is amortiza- Qualifying costs. To qualify as an organiza- • The cost of admitting or removing partners,
ble if it meets both of the following tests. tional cost, it must be: other than at the time the partnership is
• It is a cost you could deduct if you paid or • For the creation of the corporation, first organized.
incurred it to operate an existing active • Chargeable to a capital account (see chap- • The cost of making a contract concerning
trade or business (in the same field as the ter 1), the operation of the partnership trade or
one you entered into). • Amortized over the life of the corporation if business, including a contract between a
• It is a cost you pay or incur before the day the corporation had a fixed life, and partner and the partnership.
your active trade or business begins. • Incurred before the end of the first tax year • The costs for issuing and marketing inter-
Startup costs include amounts paid for the in which the corporation is in business. ests in the partnership such as brokerage,
following. A corporation using the cash method of ac- registration, and legal fees and printing
• An analysis or survey of potential markets, counting can amortize organizational costs in- costs. These “syndication fees” are capital
products, labor supply, transportation fa- curred within the first tax year, even if it doesn't expenses that can't be depreciated or
cilities, etc. pay them in that year. amortized.
• Advertisements for the opening of the busi- Examples of organizational costs include Liquidation of partnership. If a partnership
ness. the following.
• Salaries and wages for employees who are • The cost of temporary directors. is liquidated before the end of the amortization
period, the unamortized amount of qualifying or-
being trained and their instructors. • The cost of organizational meetings.
• Travel and other necessary costs for se- • State incorporation fees. ganizational costs can be deducted in the part-
nership's final tax year. However, these costs
curing prospective distributors, suppliers, • The cost of legal services.
or customers. can be deducted only to the extent they qualify
• Salaries and fees for executives and con- Nonqualifying costs. The following items are as a loss from a business.
sultants, or for similar professional serv- capital expenses that can't be amortized.
ices. • Costs for issuing and selling stock or se- How To Amortize
curities, such as commissions, professio-
Nonqualifying costs. Startup costs don't in- nal fees, and printing costs. Deduct startup and organizational costs in
clude deductible interest, taxes, or research • Costs associated with the transfer of as- equal amounts over the applicable amortization
and experimental costs. See Research and Ex- sets to the corporation. period (discussed earlier under Business
perimental Costs, later. Startup Costs). You can choose an amortization
Costs of Organizing a period for startup costs that is different from the
Purchasing an active trade or business. period you choose for organizational costs, as
Amortizable startup costs for purchasing an ac- Partnership long as both aren't less than the applicable am-
tive trade or business include only investigative ortization period. Once you choose an amorti-
costs incurred in the course of a general search The costs to organize a partnership are the di- zation period, you can't change it.
for or preliminary investigation of the business. rect costs of creating the partnership.
These are costs that help you decide whether To figure your deduction, divide your total
to purchase a business. Costs you incur in an Qualifying costs. A partnership can amortize startup or organizational costs by the months in
attempt to purchase a specific business are an organizational cost only if it meets all the fol- the amortization period. The result is the
capital expenses that you can't amortize. lowing tests. amount you can deduct for each month.
• It is for the creation of the partnership and
Example. On June 1, you hired an ac- not for starting or operating the partnership Cash method partnership. A partnership us-
counting firm and a law firm to assist you in the trade or business. ing the cash method of accounting can deduct
potential purchase of XYZ, Inc. They re- • It is chargeable to a capital account (see an organizational cost only if it has been paid by
searched XYZ's industry and analyzed the fi- chapter 1). the end of the tax year. However, any cost the
nancial projections of XYZ, Inc. In September, • It could be amortized over the life of the partnership could have deducted as an organi-
the law firm prepared and submitted a letter of partnership if the partnership had a fixed zational cost in an earlier tax year (if it had been
intent to XYZ, Inc. The letter stated that a bind- life. paid that year) can be deducted in the tax year
ing commitment would result only after a pur- • It is incurred by the due date of the partner- of payment.
chase agreement was signed. The law firm and ship return (excluding extensions) for the
accounting firm continued to provide services, first tax year in which the partnership is in How To Make the Election
including a review of XYZ's books and records business. However, if the partnership uses
and the preparation of a purchase agreement. the cash method of accounting and pays To elect to amortize startup or organizational
On October 22, you signed a purchase agree- the cost after the end of its first tax year, costs, you must complete and attach Form
ment with XYZ, Inc. see Cash method partnership under How 4562 to your return for the first tax year you are
All amounts paid or incurred to investigate To Amortize, later. in business. You may also be required to attach
the business before October 22 are amortizable • It is for a type of item normally expected to an organizational costs election statement (de-
investigative costs. Amounts paid on or after benefit the partnership throughout its entire scribed later) to your return.
that date relate to the attempt to purchase the life.
business and therefore must be capitalized. Organizational costs include the following For startup or organizational costs paid or
fees. incurred after September 8, 2008, an accompa-
Disposition of business. If you completely • Legal fees for services incident to the or- nying statement isn't required. Generally, for
dispose of your business before the end of the ganization of the partnership, such as ne- startup or organizational costs paid or incurred
amortization period, you can deduct any re- gotiation and preparation of the partner- before September 9, 2008, and after October
maining deferred startup costs. However, you ship agreement. 22, 2004, unless you choose to apply Regula-
can deduct these deferred startup costs only to • Accounting fees for services incident to the tions sections 1.195-1, 1.248-1, and 1.709-1,
the extent they qualify as a loss from a busi- organization of the partnership. you must also attach an accompanying state-
ness. • Filing fees. ment to elect to amortize the costs.
Costs of Organizing a Nonqualifying costs. The following costs If you have both startup and organizational
Corporation can't be amortized. costs, attach a separate statement (if required)
• The cost of acquiring assets for the part- to your return for each type of cost. See Starting
Amounts paid to organize a corporation are the nership or transferring assets to the part- a Business, earlier, for more information.
direct costs of creating the corporation. nership. Generally, you must file the return by the
due date (including any extensions). However,
Page 30 Chapter 8 Amortization