Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
Start-up Costs and Organization Costs
How to Make the Election to Deduct Start-up Costs and Organization Costs:
You elect to deduct start-up costs or organization costs by claiming the deduction on your tax return (filed by the due date, including extensions) for the tax year in which the active trade or business begins.
If you timely filed your return without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write the following:
- Filed pursuant to section 301.9100-2
The election applies when computing taxable income for the current tax year and all subsequent years.
Start-up Costs
Amortizable start-up costs are costs incurred while investigating the acquisition or creation of an active business (investigatory costs) and setting up an active business (pre-opening costs).
Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business.
These are the costs that help you decide whether to purchase a new business and which active business to purchase. However, costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize.
For example, your attorney prepares a letter of intent and performs services after the letter is sent. The cost to prepare the letter and the cost of services performed after the letter is sent would be deductible as a capital loss because they are costs incurred in an attempt to purchase the business.
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
- Pre-opening Costs
Investigatory Costs:
These costs relate to your decision whether to start or purchase a business and which particular business to start or purchase.
Examples include:
- 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
Pre-opening Costs:
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.
Examples include:
- Advertising the opening of the business
- Promotional items for the grand opening
- Salaries to employees for training (and their instructor(s))
- Salaries to executives
- Repairs
- Utilities
Start-up costs do not include:
- Deductible interest, taxes, or research and experimental costs.
Organization 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.
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
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
Corporations:
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.
- Commissions
- Professional fees and printing costs for issuing and selling stock.
- Costs incurred for transferring assets to the corporation.
Partnerships:
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
Costs of Not Going Into Business
Whether or not you get to deduct costs associated with your attempt to go into business depends on the type of costs you incur.
Investigatory costs to conduct a general search to start or purchase a business before a decision is made to start a particular business are not deductible if your plans to go into business are abandoned. These costs would be considered personal expenses.
Costs incurred after a decision has been made in an attempt to start or purchase a particular business, but the deal falls through, are capital expenses and are deductible as a capital loss in the year the attempt to go into business fails.
How to Deduct Start-up Costs and Organization Costs
Start-up Costs:
You may elect to deduct up to $5,000 of start-up costs in the year your business begins operations. The $5,000 first-year deduction limit is reduced by the amount of start-up costs exceeding $50,000.
Start-up costs that exceed the first-year limit of $5,000 may be amortized ratably over 15 years. The amortization period starts with the month you begin operating your active trade or business.
Start-up costs include amounts paid for the following:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business.
- Salaries and wages for employees who are being trained and their instructors.
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
- Salaries and fees for executives and consultants, or for similar professional services.
How to Claim Start-up Costs
You claim the deduction for start-up costs in Part V of Schedule C (Other Expenses), which is carried to Part II, Line 27a. Any excess amount over the first year limit of $5,000 must be amortized over 15 years (180 months). An election to amortize the excess over $5,000 is made by claiming the deduction on Form 4562, Part VI.
On Form 4562, Part VI:
- Enter the amortization amount on line 42.
- Column (d) asks for the Code section; enter 195. This is the Internal Revenue Code Section for Start-up Expenditures.
- Add lines 42 and 43 in column F. The total is entered on line 44.
- The total amount on line 44 is entered in Part V of Schedule C, Other Expenses.
Example:
- You began business operations July 1, 2021.
- You had start-up costs of $20,000.
- You may deduct $5,500 in 2021.
Figured as follows:
- First-year limit: $5,000, plus
- First year's amortization: $500, ($20,000 - $5,000/15 x 50% [July-Dec.] = $500).
First year's amortization is one half of the annual $1,000 amount, or $500.
Form 4562 and Schedule C:
- Enter the $500 amortization amount in Part VI, Form 4562, to elect to claim amortization. Also enter the number 195 in Column (d) (the Code section for Start-up expenses).
- Enter the $5,000 first-year limit and the $500 amortization amount in Part V of Schedule C. You can enter the $5,000 and $500 on a separate line and include a description for each item.
After the the first year of business operations, continue amortizing the remaining $14,500 over the next 14.5 years using Part VI, Form 4562 and Part V, Schedule C.
- Deduct $1,000 per year for 14 years.
- Deduct $500 (50% x $1,000) in the fifteenth year (Jan - June, the final six months of the 15-year amortization period).