Now that you've decided to start your own small or family-owned business, you need to decide on the business structure. Are you thinking about forming a corporation? If so, you need to know about some of the corporate organization and start-up costs, that is, what you have to pay for just to get the business started.
They may be expensive and take a good chunk out of the financial backing you've gotten from investors. But, there's a bright spot: Many of the costs can be deducted from the corporation's federal income taxes.
Types of Organization Costs
These are costs directly related to the actual creation of your new corporation. This includes many things, like:
- Legal fees for writing the corporation's charter (or "articles of incorporation"), bylaws and the terms of its stock certificates
- Accounting services
- Expenses of temporary directors
- Expenses for organizational meetings
- State incorporation fees
Organizational costs don't include things like:
- Brokers' commissions on stock sales or the costs of printing stock certificates
- Fees for transferring assets to the corporation, like real estate
Taxes and Organization Costs
The organization expenses of a new corporation usually are"capital investments." That means you're spending money to buy assets, like equipment and real estate, rather than to pay for 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. The period starts with the month the corporation "begins doing business."
You need to tell the IRS you want to amortize.To do this,file a special IRS form and write a statement describing the expenditures,the date business began, and the amortization period you want to use. Attach this statement to the corporation's tax return for the year it starts doing business.
When a corporation "begins doing business" isn't necessarily the date of incorporation. Doing some organizational tasks,like writing the corporate charter, doesn't mean you're "doing business," either. Rather, there has to be a clear indication that the business is up and running or soon will be. For example, if the corporation buys assets necessary for doing business, like machines, it's "doing business."
Example: X Corp. gets its charter on April 29, 2009. On May 2,it has its first organization meeting and buys some land from a shareholder. Later, it pays a $500 fee to its attorney for preparing the incorporation papers and a $1,000 fee for transferring the land to the corporation. Result: The corporation may amortize the $500 fee over a period of at least 60 months beginning in May 2008.
Types of Start-Up Costs
These are costs that:
- Would be deductible immediately if made by an existing business (rather than a new one), and
- Were for investigating whether to create or buy a business or for actually creating a business, or
- Were paid on the day before the corporation "began doing business"
Start-up costs include things like:
- The costs of determining potential markets, products, workers, and transportation facilities
- Wages paid to employees during training, and the costs of the training itself
- Travel and other expenses involved in lining up distributors, suppliers, or customers
Start-up costs don't include things like interest on loans, property taxes, and research and development expenses.
Taxes and Start-Up Costs
This is about the same as organization costs. Start-up expenditures can't be deducted immediately. But, they can be amortized over at least 60 months, starting with the first month business begins.Also, like organization costs, you amortize start-up costs by filing a form with a statement about the expenditures, the date business began, and the amortization period.
Questions for Your Attorney
- I started to incorporate my new business and I had some organization and start-up costs, but I changed my mind and never opened. Can I still deduct the costs?
- Can my corporation file an amended tax return to amortize costs we forgot to include in our first year's return?
- Is there a limit on the amount of costs that my corporation can amortize?