1. Start-Up Expenses
2. Organizational Costs
3. Amortization

Partnership start up costs, or start-up costs for any business, are any expenses that a business incurs to create an active business or investigate whether or not one should be created. These include expenses specifically for the opening of the business, and also expenses that would normally be regular business expenses after the start-up phase is over. This starts up phase starts when the owner begins spending money for the business. It stops upon the receipt of revenue.

Start-Up Expenses

Start-up expenses are classified within the tax code as start-up or organizational expenses. Any costs associated with actually acquiring the business need to be added to the buyer's base in the business, or capitalized, which should be amortized over a fifteen year period or longer. Any costs that are capitalized may only be retrieved upon the business's dissolution or termination. Some of these costs may include:

  • Overhead costs before the business actually begins, such as rent, telephone, internet, etc.
  • Initial hiring and training of new employees.
  • Licensing and permits.
  • Research costs associated with your business startup.
  • Advertising the opening of the business.
  • Surveying potential customers or markets.

These start-up costs do not include any investigation as to which type of business to open or whether to open a business. Once it is decided what business is to be opened, then these expenses can be included. There are typically many start-up expenses. All must be accounted for and separately listed, but can all be grouped under start-up expenses.

Once the business is running normally, many of these same expenses are considered business operating expenses. These are either deductible as normal over the tax year, or in some cases, can be depreciated over several years. While being set up, though, there won't be any deductible or depreciating expenses for the business. Any expenses before the business operations begin are amortizable.

Organizational Costs

Organizational costs are different than start-up costs in that they are incurred for the actual creation of the business entity, whether it be a partnership, LLC, or corporation. If the total start-up costs are over five thousand dollars, these costs are accounted for separately. These expenses can be incurred anytime within the first year of the business or prior to the deadline of the first return. Organizational costs include:

  • Organizational meetings.
  • Temporary directors.
  • Legal fees.
  • Incorporation fees.

Organizational costs are amortized and deducted in a very similar way to start up costs. If the full amount of business expenses is under five thousand dollars, they can still be deducted under organizational expenses if the business owner so chooses. This is especially useful if the amount is near five thousand dollars.

The actual cost of purchasing the business itself and any other expense associated with the purchase are not amortizable and should be capitalized. Additionally, any costs associated with creating, distributing, or selling stock, such as commissions and printing fees, are not eligible to be amortized.

Amortization

Organizational costs and start-up costs may be amortized over any amount of time stretching 15 years or longer. The amount of the deductible is the amount of the total costs, divided by the years of the period of amortization. Once the business has selected the period of amortization, it cannot be changed.

A company can file for amortization using form 4562, Depreciation and Amortization. This form is attached to the return for the first year of business. If the business has started up and organizational expenses, there should be two separate statements attached to the tax form. For businesses utilizing the cash method of accounting, all expenses claimed must be paid by the end of the first year. The business also can choose to capitalize the startup costs and organizational costs on the first tax return, as long as it is filed by the due date.

If the business chooses not to amortize start-up or organizational expenses, the expenses are added to the business's base. This means these expenses can only be recovered when the business ends. If the costs are amortized and the business ends before the amortization period ends, the unamortized amount that qualifies as a business loss can be deducted in the final year of the business.

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