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Per IRS Publication 535 Business Expenses, starting on page 26:

Business Start-up and Organizational Costs

Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 8.

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.

How to make the election. You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. For costs paid or incurred after September 8, 2008, you are not required to attach a statement to your return to elect to deduct such costs. However, for start-up or organizational costs paid or incurred before September 9, 2008, you may be required to attach a statement to your return to elect to deduct such costs. If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write “Filed pursuant to section 301.9100-2.”

On page 28:

Starting a Business

For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. The costs that aren't deducted currently can be amortized ratably over a 180-month period. The amortization period starts with the month you begin operating your active trade or business. You aren't required to attach a statement to make this election. You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. See Regulations sections 1.195-1, 1.248-1, and 1.709-1.

Amortization

Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. It is similar to the straight line method of depreciation.

How to Deduct Amortization

To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return.

On page 29:

How to Amortize

Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier under Business Start-up Costs). You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both aren't less than the applicable amortization period. Once you choose an amortization period, you can't change it.

To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month.

See pages 26-27 for additional information about which start-up and organizational costs are qualified. Also, there may be different rules depending on when the expenses were paid. Additional information can also be found in Section 195 of the Internal Revenue Tax Code.

To enter the start-up costs in the TaxAct program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Business income or loss from a sole proprietorship.
  3. Click + Add Schedule C to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Business Income - Amortization, click Yes.
  6. On the screen titled Amortization - Description, enter "Start-Up Costs" for the Amortization description, enter or select the Date amortization begins, enter the total Amortizable amount costs, select the number of years from the Amortizable period (years) drop-down, select a code from the Code section number drop-down (per the Form 4562 instructions - click the learn more icon for more information), then click Continue.
  7. On the screen titled Amortization - Prior Amortization, enter the portion of the total start-up costs you are electing to expense in the current year as the Prior amortization amount, select the Date sold, then click Continue.
  8. On the summary screen, your current year amortization amount and start-up expenses will be outlined.

Note. If you have already made amortization entries, then you will be brought to the screen titled Business Income - Amortization Review, where you can click Add or Review, whichever is applicable in your situation.

The current year expense and amortization amount will appear on Form 4562 Depreciation and Amortization, Line 42. When you print the return, you will see a worksheet titled "Amortization Expenditure Summary," which will provide a break down of the total costs and how much was elected to be expensed in the current year.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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