The IRS issued final regulations (T.D. 9542) governing elections by individual taxpayers, corporations, and partnerships to deduct start-up expenses or organizational expenditures. The regulations adopt (with a slight change) temporary regulations the IRS issued in 2008 (T.D. 9411).
The rules provide guidance on the application of Section 902 of the American Jobs Creation Act of 2004, P.L. 108-357, which amended Secs. 195(b), 248(a), and 709(b) to allow electing individual taxpayers (in the tax year they begin an active trade or business) and corporations and partnerships (in the tax year they begin business) to deduct up to $5,000 of start-up expenses (individuals) or organizational expenditures (corporations and partnerships). The remainder of the start-up or organizational expenses can be amortized over the 180-month period beginning with the month in which the active trade or business begins.
The deductible amount is reduced by the amount by which start-up or organizational expenditures exceed $50,000; in other words, no first-year deduction (beyond the amount of amortization for the first year) is allowed if start-up expenses equal or exceed $55,000. (For tax years beginning in 2010 only, the Small Business Jobs Act of 2010, P.L. 111-240, increased the maximum first-year deduction for individual taxpayers (but not corporations or partnerships) to $10,000 and the phaseout threshold to $60,000.)
Except under provisions of the three sections, taxpayers cannot take a deduction for start-up or organizational expenditures.
The final regulations provide the time and manner of making the election. The election is automatic: An individual taxpayer, corporation, or partnership is deemed to have made an election to deduct start-up expenditures in the year in which it begins an active trade or business (individual taxpayers) or begins business (corporations and partnerships). The entity may forgo the deemed election by “affirmatively electing” (rather than “clearly electing” as the temporary regulations had stated) to capitalize its start-up expenses on a timely filed federal income tax return (including extensions) for the tax year in which the active trade or business begins. The election is irrevocable and applies to all start-up expenditures.
The regulations also provide guidance on the meaning of “begins business” as applied to corporations: If activities “have advanced to the extent necessary to establish the nature of its business operations,” the entity is deemed to have begun business.
The final rules were effective August 16, 2011, and apply to expenditures paid or incurred after that date. Taxpayers may also apply them to expenditures paid or incurred after October 22, 2004, to the extent not barred by the limitation period for assessment of tax.