Organizational Expenditures

From TaxAlmanac

Organizational Expenditures

The “American Jobs Creation Act of 2004” was signed into law by [President Bush] on October 22, 2004. One of the provisions of this act affects the way business start-up and organizational costs are deducted. Internal Revenue Code Section 248(a) states:

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§ 248 Organizational Expenditures.

(a) Election to deduct.
If a corporation elects the application of this subsection (in accordance with regulations prescribed by the Secretary) with respect to any organizational expenditures -

(1) the corporation shall be allowed a deduction for the taxable year in which the corporation begins business in an amount equal to the lesser of -

(A) the amount of organizational expenditures with respect to the taxpayer, or
(B) $5,000, reduced (but not below zero) by the amount by which such organizational expenditures exceed $50,000, and

(2) the remainder of such organizational expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the corporation begins business.

Business start-up and organizational costs must be capitalized unless an election is made to deduct or amortize them. For costs paid or incurred after October 22, 2004, the following rules apply to each category of costs:

• the corporation can elect to deduct up to $5,000 of the business start-up and organizational costs for the year the corporation begins business operations.
• the $5,000 deduction is reduced by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.
• if the election is made, any expenditures that are not deductible must be amortized over a 180-month period, beginning with the month the corporation begins business operations.