[startupcfo]

Assume that you’re starting a small business (restaurant) for 32K. IRC Sec. 248 allows you to deduct 5,000 in the current year and spread out the remaining 27,000 over the next 15 years. Most small businesses, especially a restaurant, are *NOT* going to survive 15 years.

A) Is there a way to accelerate the schedule so you can enjoy the deductions faster than over 180 months?

B) What happens to the “leftover” deductions if your business closes shop after 3 years? That’s now 21,600 in deductions I’d want to use.

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Corporate finance leader

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[PurpleK]

A) No, you must amortize over 15 years.
B) If you liquidate before the end of 15 years, you can expense all of the remaining organizational costs on your final tax return.

Also, assuming you started your business during the year, in addition to the $5k in the first year, you can also begin amortizing from the month in which the business started.

[startupcfo]

Does your entity have an impact on whether or not IRC Sec 195 applies?

Can you do this if you're a sole proprietor or a partnership?

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Corporate finance leader

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
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FAR - XX | 12/10

[monikernc]

here. this is not authoritative but it helped understand it all better when you first posted the question.
https://www.thetaxadviser.com/issues/2014/may/clinic-story-09.html

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[startupcfo]

So what happens if organizational costs are like 80,000 (anything over 50K)

Does that mean that you lose the 5,000 deduction and the remaining 80,000 is spread out over 180 months? Or is 50K spread out over the next 180 months? Or you get nothing because it's too much?

AUD - 93
BEC - 87
FAR - 77
REG - 77

------------
Corporate finance leader

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10

[PurpleK]

Section 195, 248, 709 are all similar in that they are related to startup/organizational costs. There is a slight difference in definition between startup costs and organizational costs, which you can read in the Code. Regardless of which Code section, the AJCA of 2004 only allows for the $5k deduction once in the year when the active trade or business commences. It does not matter whether you are a sole-proprietorship, corporation, or partnership (though 709 is specifically for partnerships).

Once organizational costs exceed $50k, there is a dollar for dollar phase out. Once the costs reach $55k, you can no longer take the $5k deduction. For costs greater than that, such as $80k, the whole amount is amortized over 15 years.

[Author]

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