A corporation startup cost is applicable for amortization over a certain number of years. Startup costs can include things such as:

  • Market research
  • Analysis
  • Consulting fees

Basics of Corporation Startup Costs

The startup and organizational costs of new businesses in the United States are considered capital costs and can be amortized over a certain amount of time.

It is important for the following groups of people to understand the difference between startup costs and other business costs:

  • Investors
  • New business owners
  • Project managers

This distinction is important for the following reasons:

  • Startup costs and organizational costs are budgeted for differently than capital and operating expenses.
  • Startup costs and organizational costs might be applicable for different tax treatment than other costs.

While startup costs tend be costly and use up much of a business's financial support from investments, most of the costs can be applied as a federal tax deduction for the business.

Defining Organization Costs

Costs that are directly connected to the startup of a new business are considered organizational costs. Some examples include:

  • Legal fees for establishing documents such as the articles of incorporation, bylaws, and stock certificate terms
  • Short-term directors' salaries
  • State incorporation costs
  • Accounting services
  • Costs for meetings

Some examples of costs that are not considered organizational costs include:

  • Brokers' stock sales commissions
  • Stock certificates printing fees
  • Asset transfer fees

Typically, the organization costs of a startup business are considered capital investments because the costs are due to asset purchases rather than everyday business costs.

Usually, capital investments are not tax deductible until the corporation is disestablished. However, startup businesses can choose to amortize, or gradually deduct, its organization costs over a time frame of 60 months. This time frame starts when the the startup begins conducting business.

To amortize, you must inform the IRS of your desire to do so and complete the following steps:

  1. File a form with the IRS.
  2. Provide a statement listing the costs, the business start date, and the amortization period being used.
  3. Attach the statement to the business's federal income tax return.

The business's start date is not automatically its date of incorporation. This date must be clearly signified with evidence that the business is running or ready to run. For instance, the purchase of production machines would show that the company is in business.

Defining Startup Costs

Startup costs should meet the following standards:

  • If made by a current business, they would be instantly deductible.
  • They were used to create a business or for looking into establishing or buying a business.
  • The costs were paid prior to the company's first day of doing business.

Startup costs could include expenses such as:

  • Market research
  • Market analysis
  • Labor supply, location suitability, and transportation research and analysis
  • Costs for obtaining suppliers or distributors
  • Consulting fees prior to opening
  • Executive salaries prior to opening
  • Advertising costs to promote the opening of the business
  • Training and employee expenses prior to opening
  • Costs for obtaining customers

The following costs are not included in startup costs:

  • Loan interest
  • Property taxes
  • Research and development costs

Costs that would normally be capitalized, for example, the development of a capital asset, are not considered startup costs.

According to Section 195, a corporation can deduct up to $5,000 of startup costs. This deduction must be decreased by the increasing total of startup costs that surpasses $50,000.

As stated previously, startup costs may not be deducted right away, but they can be amortized over a period of 60 months with the first day being the company's first day of business.

When it comes to planning, startup costs can include both capital costs and operating expenses provided they meet the following requirements:

  • The costs occur prior to earning income or reaping any benefits from the business.
  • They are only paid if the startup successfully begins.

There are many types of costs that meet these requirements, including:

  • IT system acquisition costs
  • Lab equipment costs
  • Prior advertising
  • Building construction and remodeling
  • Legal services
  • Permit and license fees
  • Feasibility research
  • Recruiting staff
  • Development costs
  • Deployment expenses
  • Establishment costs
  • Training expenses

When it comes to taxes, costs might need to be divided into more detailed categories such as:

  • Startup costs for book purposes
  • Startup costs for tax purposes
  • Section 195 startup costs
  • Section 197 startup costs

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