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Expensing Start-Up Costs

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another student wishes to defer these costs and amortize them in the future. Which student is correct and why?

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First, there are start up costs and there are organizational costs both under Code Section 195 of the Internal Revenue Code.

Start up costs are those incurred prior to actually commencing operations and generally are not allowable as a deduction against revenue. There is, however, a special election that can be made to expense the ...

Solution Summary

In a 206 word solution, the concept and application of start up costs is discussed including the options that can be used. The student with the correct answer is included with an explanation.