For businesses that are starting up, it’s important to understand the rules governing the deductibility of start-up costs – those costs that incurred before the business begins, such as costs associated with the preparation of
necessary legal documents and the establishment of a business plan.
Expenses incurred with beginning a business, if they are classified by IRS as “start-up” costs, are deductible over a 15-year period under I.R.C. §195 (for corporations, the same rules are contained in I.R.C. §248, and for partnerships it’s I.R.C. §709). In addition, start-up expenses are permanently capitalized and non-amortizable if the taxpayer fails to make the proper elections on the initial tax return. An exception exists for the first $5,000 of start-up expenditures – they are deductible at the end of the start- up phase if total start-up costs don’t exceed $50,000.
But, IRS has now issued regulations deeming start-up cost elections automatic. Effective, July 8, 2008, the regulations apply to expenditures paid or incurred after October 22, 2004 (provided the statute of limitations has not run). Taxpayers still must keep track of start-up costs, but won’t need to make a separate election – now there’s no penalty for failing to make the election. T.D. 9411, 73 Fed. Reg. No. 131 (Jul. 8, 2008).