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Need Some Deductions for 2011?
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Updated for 2011
Small Business Deductions: Startup Costs
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How to Deduct Start-up Costs and Organizational Costs
The following rules apply to both start-up costs and organizational costs:
After October 22, 2004:
- You may elect to deduct up to $5,000 of start-up costs and $5,000 of organizational costs in the tax year your business begins (a $10,000 upfront deduction.)
- Take the deduction on Schedule C, Line 27.
- Any excess amount over $5,000 for start-up costs must be amortized over 15 years (180 months).
- Use Form 4562, Part VI to enter the amortization amount.
- Carry the amount from Form 4562 to Schedule C, Line 27.
- Reduce the $5,000 deduction for start-up costs by the amount your total start-up costs exceed $50,000.
- Reduce the $5,000 deduction for organizational costs by the amount your total organizational costs exceed $50,000.
Example:
- Your started business June 1, 2011
- You are a calendar year taxpayer (January 1, thru December 31)
- You have been in business 7 months (June 1 thru December 31)
- Total start-up costs were $12,000
- You spent money on ads, travel, and consultants
- Total organizational costs were $3,000
- You spent money on attorney fees to incorporate your business, the state incorporation fee, and accounting fees to set up your books,
In 2011, you elect to deduct $5,000 in start-up costs, amortize the remaining $7,000 over 15 years (180 months), and deduct the entire $3,000 of organizational costs. Your total deduction is $8,272 ($5,000 + $272 + $3,000). The amortization amount of $272 is determined as follows: $7,000/180 x 7.
Schedule C: You enter your total deduction of $8,272 on Line 27 of Schedule C. Use Part V of Schedule C to list your three deductions: start-up costs deduction: $5,000; Amortization of start-up Costs: $272; Organizational costs: $3,000.
Form 4562: Complete Part VI for the amortization deduction ($272). In column (d) where it asks for the Code section, enter 195 (that's IRC section for start-up expenditures)
Statement: Prepare a statement which includes: A description of each expense, amount of each expense, when incurred, date the business began operations, number of months in the amortization period. Attach your statement, Form 4562, and Schedule C to your Form 1040.
Next:
Start-up and Organizational Costs: How to Claim Start-up Costs and Organizational Costs
Related Links
- What Are start-up Costs?
- Qualifying start-up Costs
- Two Categories of start-up Costs
- Purchasing an Active Trade or Business
- Costs of Not Going Into Business
- When Does a Business Begin?
- What are organizational Costs?
- start-up Costs versus Organizational Costs
- Qualifying Organizational Costs
- Nonqualifying Organizational Costs
- How to Make the Election to Deduct start-up and Organizational Costs
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