Tax Article - Start-up and Organizational Expenditures – Recent Changes

The recently enacted American Jobs Creation Act of 2004 modified the treatment of organization costs and start up costs. The start-up costs of a business and the organizational expenditures of a corporation or partnership are capital expenditures and, as such, generally are not immediately deductible. However, with respect to expenditures paid or incurred after October 22, 2004, a taxpayer may elect to deduct up to $5,000 of start-up expenditures and up to $5,000 of organizational expenses in the taxable year in which the business begins, and may amortize the remainder of the expenses over a 180 month (15 year) period.

The former law provided that a taxpayer could elect to treat start-up and organizational expenditures as deferred expenses and amortize the entire amount equally over a period of not less than 60 months (not 180 months), beginning with the month in which the active trade or business, corporation, or partnership begins.

Start-up expenditures are amounts paid or incurred by any business that would have been deductible as trade or business expenses, had they not been paid or incurred before business began. Organizational expenditures are expenditures that are incident to the creation of a corporation or the organization of a partnership, such as legal and professional expenses to incorporate/create the entity and to draft the related shareholder/partner/member agreements. Expenses for raising equity, sometimes known as syndication fees, are usually not amortizable.

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