Question

Amortization - Business Start-Up and Organizational Costs (Forms 1065, 1120-S, and 1120)

Accepted Answer

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.

Note. Organizational costs usually only pertain to a corporation or partnership.

You can elect to deduct up to $5,000 of business start-up paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up costs exceed $50,000. Any remaining costs must be amortized.

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 are not 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 are not required to attach a statement to make this election. Once made, the election is irrevocable.

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 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.

How to Deduct Amortization

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

Please see IRS Publication 535 Business Expenses 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.

Partnership (Form 1065)

From within your TaxAct return (Online or Desktop), click Federal to expand, then click Deductions. On smaller devices, click in the upper left-hand corner, then click Federal.
Under the Deduction Examiner, click Review in the "Amortization" row.
On the screen titled Business Deductions - Amortization, click Yes.
On the screen titled Amortization - Description, enter the Amortization description, select the Date amortization begins, enter the TOTAL Amortizable amount, select the number from the Code section drop-down (via Form 4562 instructions), select the number of years from the Amortizable period (years) drop-down, then click Continue.
On the screen titled Amortization - Prior Amortization, enter the Prior amortization, select the Date sold, then click Continue.
The summary screen will outline the current year amortization amount and start-up and/or organizational expenses.

S Corporation (Form 1120-S)

From within your TaxAct return (Online or Desktop), click Federal to expand, then click Deductions. On smaller devices, click in the upper left-hand corner, then click Federal.
Under the Deduction Examiner, click Review in the "Amortization" row.
On the screen titled Business Deductions - Amortization, click Yes.
On the screen titled Amortization - Description, enter the Amortization description, select the Date amortization begins, enter the TOTAL Amortizable amount, select the number from the Code section drop-down (via Form 4562 instructions), select the number of years from the Amortizable period (years) drop-down, then click Continue.
On the screen titled Amortization - Prior Amortization, select the Date sold, then click Continue.
The summary screen will outline the current year amortization amount and start-up and/or organizational expenses.

C Corporation (Form 1120)

From within your TaxAct return (Online or Desktop), click Federal to expand, then click Deductions. On smaller devices, click in the upper left-hand corner, then click Federal.
Under the Deduction Examiner, click Review in the "Amortization" row.
On the screen titled Business Deductions - Amortization, click Yes.
On the screen titled Amortization - Description, enter the Amortization description, select the Date amortization begins, enter the TOTAL Amortizable amount, select a number from the Code section drop-down (via Form 4562 instructions), select the number of years from the Amortizable period (years) drop-down, then click Continue.
On the screen titled Amortization - Prior Amortization, select the Date sold, then click Continue.
The summary screen will outline the current year amortization amount and start-up and/or organizational expenses.

The current year expense and amortization amount will appear on Form 4562, Line 42. When you print the return, you will see two attached supporting worksheets. The first, titled "Supporting Details for Other Business Deductions," will show the total current year expense and amortization amount. The second, titled "Amortization Expenditure Summary," will give 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.