Temp. Regs. Allow Deemed Election to Expense Startup, Organizational Costs
Major changes corporate tax practitioners should be aware of.
by Shashi Mirpuri/The Tax Adviser
Effective July 8, 2008, the IRS issued new temporary regulations to amend the rules under Secs. 195, 248 and 709 regarding elections to deduct startup expenditures and organizational expenditures of corporations and partnerships (T.D. 9411).
The major change in these new regulations is that they make the election to deduct startup costs and organizational expenditures automatic. Previously, a taxpayer had to attach a separate election to its return in order to elect to deduct startup expenses under Sec. 195(b) or organizational expenses under Secs. 248(b) or 709(b). The temporary regulations eliminate this requirement for expenses paid or incurred after September 8, 2008 (Temp. Regs. Secs. 1.195-1T(b), 1.248-1T(c) and 1.709-1T(b)(2)).
The election either to amortize startup/organizational expenditures or to capitalize them is irrevocable and applies to all costs related to the active trade or business. A change in the characterization of an item as a startup/organizational expenditure is a change in accounting method to which Secs. 446 and 481(a) apply if a taxpayer has treated the item consistently for two or more tax years.
As amended by §902 of the American Jobs Creation Act of 2004, P.L. 108-357, Secs. 195(b), 248(a) and 709(b) allow an electing taxpayer to deduct, in the tax year in which the taxpayer begins an active trade or business, an amount equal to the lesser of (1) the amount of the startup or organizational expenditure that related to the active trade or business or (2) $5,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $50,000. The remainder of the startup or organizational expenditures is amortized over a 180-month period (15 years) beginning with the month in which the active trade or business begins.
Under the prior regulations, the election to amortize startup and organizational expenses had to be made in an affirmative statement attached to a timely filed tax return (including extensions) (Regs. Secs. 1.195-1(b), 1.248-1(c) and 1.709-1(c)). Once made, this election was irrevocable, which created issues for taxpayers that improperly deducted startup or organizational expenses as ordinary business expenses. If it was later determined that an expense was a startup or organizational expense rather than an ordinary expense, the taxpayer would be unable to deduct or amortize them.
However, if a taxpayer timely filed a return for the year without making the election, the taxpayer could still make the election by filing an amended return within six months of the return’s due date (excluding extensions). The election had to be clearly indicated on the amended return, along with the notation “Filed pursuant to Section 301.9100-2.”
This article has been excerpted from The Tax Adviser. Read the full article here (PDF).