Page 553 - TaxAdviser_2022

as a deduction for the taxable year
In all, as long as the above rules are followed, in which paid or incurred.

scholarship grants can be nontaxable to both Once the amount of the startup
the exempt private foundations granting them costs is established, how much of the
and the recipients of the grants. costs can be recovered, and when, must
be determined. Sec. 195(b)(1)(A) al-
lows a deduction in the tax year the
trade or business becomes active of the
a report or other similar product; or during the time leading up to getting lesser of the amount of the startup ex-
improve or enhance a literary, artistic, the doors open for business? In other penses or $5,000. However, if the total
musical, scientific, teaching, or other words, when can startup costs be startup costs are greater than $50,000,
similar capacity, skill, or talent of deducted by a new business? This the $5,000 deduction is reduced dollar
the grantee. question should be addressed by for dollar for any amount of startup
For example, in Letter Ruling every startup company. The costs expenses over $50,000, until the $5,000
202223017, the IRS ruled that a private associated with investigating a new goes to zero. In other words, if startup
foundation’s proposed scholarship grants business idea for potential viability expenses are greater than $55,000,
to students from a specific county to and those incurred when getting there is no immediate expensing of any
attend two-year and four-year colleges the new business started can be of the startup costs.
met the requirements in (1) above, so the voluminous. New business owners Sec. 195(b)(1)(B) provides that any
grants would not be taxable expenditures are often surprised to find out startup costs that are not allowed to
by the exempt private foundation. that those expenses are not usually be expensed in the first tax year of the
What kind of expenses can recipients immediately deductible. business must be amortized and then
use the money for without making it Sec. 162(a) permits ordinary and ratably deducted over the 180-month
taxable to them? They may use it for necessary expenses to be deducted in period beginning with the month in
qualified tuition and related expenses, the tax year incurred while carrying which the active trade or business be-
which, per Sec. 117(b)(2), are (1) tuition on any trade or business. However, gins. The expenses are not disallowed,
and fees required for the enrollment or Sec. 195(a) generally disallows a but they must be capitalized over a
attendance of a student at an educational deduction for startup costs. Startup longer period.
organization and (2) fees, books, sup- costs are costs that are paid or incurred The election to deduct startup costs
plies, and equipment required for courses prior to the company’s becoming in the tax year in which the taxpayer
of instruction at such an educational an active trade or business or prior begins an active trade of business is
organization. Room and board expenses to a business’s being acquired. Sec. deemed to be automatically made.
and books that are not mandatory are 195(c)(1) defines these costs as being Regs. Sec. 1.195-1 provides that
not included. connected with: taxpayers are not required to make a
In all, as long as the above rules are separate election statement on their
followed, scholarship grants can be non- (A)(i) investigating the creation return in that tax year. However, they
taxable to both the exempt private foun- or acquisition of an active trade or can make an election stating the
dations granting them and the recipients business, or (ii) creating an active startup expenses will be capitalized
of the grants. trade or business, or (iii) any activity on the return if they wish to forgo the
From Rui Liang, M. Acc., engaged in for profit and for the deemed election.
San Francisco production of income before the day Some examples of costs that qualify
on which the active trade or busi- as recoverable startup costs include an
ness begins, in anticipation of such analysis or survey of potential markets,
Expenses & Deductions activity becoming an active trade products, labor supply, transportation
or business, and (B) which, if paid facilities, etc.; advertisements for the
Deduction of startup or incurred in connection with the opening of the business; salaries and
expenses operation of an existing active trade wages for employees who are being
When is a company allowed to report or business (in the same field as the trained and their instructors; travel
as deductions on a tax return the trade or business referred to in sub- and other necessary costs for securing
expenses that have been incurred paragraph (A)), would be allowable prospective distributors, suppliers, or

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