Corporate Organization and Start-Up Costs Text Size:

Now that you've decided to take the leap and start your own small business, you need to decide what business form or business structure to use: sole proprietorship, partnership? What about forming a corporation? If you're considering a corporation, you need to know about some of the corporate organization and start-up costs you'll have, that is, costs and expenses that you have to pay for just to get the business started.

These organization and startup costs can be expensive, and they could take a good chunk out of the financial backing you've arranged for the business. But, there is a bright spot: many of the corporation's organization and startup costs can be deducted from the corporation's federal income tax.

Types of Organization Costs & Expenses

Organizational costs are expenditures that are directly related to the actual creation of your new corporation. There are a number of organization expenses that you'll probably come up against when forming your corporation, such as:

• Legal fees for drafting the corporation's charter (or "articles of incorporation"), the corporation's bylaws, and the terms of the corporation's stock certificates
• Accounting services associated with creating the corporation
• Expenses of temporary directors
• Expenses for organizational meetings
• State incorporation fees

Organizational costs do not include things like:

• Costs for issuing and selling stock, such as brokers' commissions and costs of printing the stock certificates
• Costs and fees that are the result of transferring ownership of assets to the corporation, such as real estate

Tax Treatment of Organization Costs

The organization expenses of a new corporation are ordinarily considered a "capital investment," that is, money used for the purchase of assets like equipment and real estate, rather than to pay for the corporation's day-to-day operations. Normally, capital investments can't be claimed as tax deductions until the corporation is terminated, or "dissolved." But, a new corporation can elect to amortize its organization expenses-- that is, deduct the expenses gradually-- over a period of at least 60 months, beginning with the month in which the corporation begins doing business.

You have to make an election to amortize the organization expenses. To do this, you have to file a special IRS form and attach a statement to the corporation's tax return for the taxable year in which the corporation begins business. The statement must describe the expenditures, must give the date of beginning business, and must state the amortization period elected.

The time in which a corporation begins doing business is not necessarily the date of its incorporation. Mere organizational activities, such as obtaining the corporate charter, do not indicate that business has begun. Rather, there must be some clear indication that the business is up and running or will be soon. For example, if the corporation buys operating assets, like machines or equipment, that are necessary in its business, it will be considered to be "doing business."

Example: X Corp. received its charter on April 29, 2008. On May 2, 2008, it held its first organization meeting and acquired some real property from a shareholder. Later, it paid a fee of $500 to its attorney for preparing the incorporation papers and a fee of $1,000 in connection with the transfer of the property to the corporation. Result: The corporation can amortize the $500 fee over a period of at least 60 months beginning in May 2008.

Types of Start-Up Costs & Expenses

Start-up costs are expenditures that are expenses that:

• Would be deductible immediately if they were made by an existing (rather than new) business, and
• Were made in connection with investigating the creation or acquisition of a business or with actually creating a business, or
• Were paid on the day before the corporation actually began doing business

Start-up costs include things like:

• The costs of analyses or surveys of potential markets, products, labor supply and transportation facilities
• Advertising
• Salaries and wages paid to employees while they are being trained for the new business, and the cost of their instruction
• Travel and other expenses involved in lining up prospective distributors, suppliers, and/or customers

Start-up costs do not include things like interest, taxes and expenses related to research and development.

Tax Treatment of Start-Up Costs

Similar to organization costs, start-up expenditures can't be deducted immediately, but the corporation can elect to amortize them over a period of at least 60 months, beginning with the first month of active business. And, as with organization costs, you elect to amortize start-up costs by filing the appropriate form and a statement describing the expenditures, giving the date of beginning business and selecting an amortization period.

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