START UP EXPENDITURES


Question Description:

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START UP EXPENDITURES

· Read IRC at http://www.fourmilab.ch/ustax/www/t26-A-1-B-VI-195.html
· Read IRS Pub 535, pages 26 – 27 http://www.irs.gov/pub/irs-pdf/p535.pdf
· Read Treas. Reg. 1.195-1http://www.taxalmanac.org/index.php/Reg._1.195-1

Of all issues in taxation I think that “Start Up Expenditures” is the biggest tax trap in the area of Income Tax.
As a Revenue Agent I NEVER audited a business that had treated “Start Up Expenditures” correctly!

More than a third of the businesses I audited with this issue went bankrupt after I issued the CORRECT amount they could amortize as start up expenditures.

As budding tax professionals I want you to write a 2 page essay regarding start up expense issues.

Please cite the Internal Revenue Code, Treasury Regulations, IRS Publications, Court Cases, or any relevant articles you might find in the library or on the internet by “googling” Business Startup expenses (but most Google research is wrong on this point and it is NOT Authoritative source. Again, if you use authoritative information cite your references for maximum points.

(1) 1 page spent discussing the issues and consequences inherent in IRC section 195 including, but not limited to, the following:
· Does 195 apply to all businesses organizations
· Compare & contrast Startup and Organization expenses
· What year must you elect to amortize Startup expenses
· On what form do you amortize Startup expenses
· On what form do you make the election to amortize Startup expenses

(2) 1 page spent discussing the issue of:
· When does a business begin
· Obviously you can not have Business Expenses until you have a business. So when does it start???

I would love to see you get (2) correct but here I am looking for your thought and reasoning process more than a correct answer. I actually want you to wake up in the middle of the night and ponder the issues. And you thought Tax was only about numbers and tax returns!!!!

For Example, does a Furniture Manufacturing Business start when:
• A individual writes a business plan
• A individual gets a business license
• A individual sets up a business checking account
• The individual rents a building for her business and starts paying $10,000 a month rent on that building
• The individual purchases all the equipment, at a cost of $60,000 needed to make furniture
• The individual purchases the wood at a cost of $20,000 to make the furniture
• The individual hires employees to train at a cost of $45,000 a month in wages and benefits
• The individual opens his doors for business
• The individual makes his first sale for $2,500
• OR, another date

Answer

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