Start-up Costs and Organization Costs
Start-up costs are costs incurred in investigating the acquisition or creation of an active business (investigatory costs) and setting up an active business (pre-opening costs).
Qualifying Start-up Costs
Qualifying start-up costs are costs you pay or incur before the day your active trade or business begins. They are the same types of costs you could deduct if you paid or incurred them while operating an existing, ongoing business.
Two Categories of Start-up Costs
Start-up costs can generally be divided into two categories:
- Investigatory Costs
- Preopening Costs
These costs relate to your decision whether to start or purchase a business and which particular business to start or purchase.
- Analysis of products, labor supply, and transportation facilities
- Fees for consultants and professional services
- Surveys of potential markets
- Travel costs for securing distributors, suppliers, and customers
These are costs incurred after you have made the decision to take the plunge and decided on a particular business, but before your business actually begins.
- Advertising the opening of the business
- Promotional items for the grand opening
- Salaries to employees for training (and their instructor(s))
- Salaries to executives
Start-up costs do not include:
- Deductible interest, taxes, or research and experimental costs.
Organization costs are the direct costs of creating a corporation or partnership. They should not be confused with start-up costs which are costs incurred to investigate the acquisition or creation of an active business, and the costs of setting up an active business.
Qualifying Organization Costs for a Corporation
Examples of qualifying organization costs for setting up a corporation include:
- Accounting fees to set up the corporation's books
- Costs of organization meetings
- Costs of temporary directors
- Legal fees to draft the corporate charter, bylaws, minutes of organization meetings, terms of original stock certificates
- State incorporation fees
Qualifying Organization Costs for a Partnership
Examples of qualifying organization costs for setting up a partnership:
- Accounting fees to set up the partnership's books
- Filing fees
- Legal fees for negotiation and preparation of the partnership agreement
Nonqualifying Organization Costs
The following costs do not qualify as organization cost for corporations. Instead, they are classified as capital expenses and not amortizable.
These costs are part of the basis of your business and are recovered only when you dispose of your business.
- Professional fees and printing costs for issuing and selling stock.
- Costs incurred for transferring assets to the corporation.
The following costs do not qualify as organization cost for partnerships:
- Cost of transferring assets to the partnership
- Cost of making a contract regarding the operation of the partnership
- Costs of preparing a prospectus
- Syndication costs of marketing and issuing partnership interests
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- Return to the Business Deductions Table of Contents to find related links