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Business Startup; organization expenses; date business began

Read IRC at http://www.fourmilab.ch/ustax/www/t26-A-1-B-VI-195.html
Read IRS Pub 535, pages 26 - 27 http://www.irs.gov/pub/irs-pdf/p535.pdf
Read Treas. Reg. 1.195-1http://www.taxalmanac.org/index.php/Reg._1.195-1

Discuss the issues and consequences inherent in IRC section 195 including, but not limited to, the following:

Does 195 apply to all businesses organizations
Compare & contrast Startup and Organization expenses
What year must you elect to amortize Startup expenses
On what form do you amortize Startup expenses
On what form do you make the election to amortize Startup expenses

Discuss the issue of when does a business begin?

Solution Preview

(1) Code Section 195 allows for the amortization of start-up costs for any trade or business, regardless of the legal form of the business. Included would be sole proprietorships, partnerships, C corporations, S corporations, LLC and even trusts that have an active trade or business.

The term 'trade or business' is not actually defined in the Internal Revenue Code, but has been interpreted to mean any activity engaged in for profit. There must be a profit motive and some kind of economic activity to support the definition. Facts and circumstances could certainly dictate whether an activity is actually a trade or business. The most commonly debated question has to do with lack of a profit motive. Regulation 1.183 lists factors which might help evaluate a profit motive. This regulation contains the 'so called' hobby loss rules.

The difference between organizational costs and start-up expenses are that organizational costs relate to setting up a framework in which to conduct a trade or business. Examples may include the cost of incorporation, stock issuance, preparation of documents, advice from attorneys and CPAs, organizational meetings, state licensing fees, for example.

Startup costs, on the other hand, are those which would have been allowable expenses of a trade or business had the business already begun operations. There are some which require thought as to which category. For example, training costs, lining up suppliers, investigating the acquisition of an existing trade or business, or costs related to surveying the ...

Solution Summary

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