GAAP/Start up Q

[Snaggletooth]

During a start-up period, Crossroads Sporting Goods incurred $20,000 in Start-Up Costs which cannot be deducted in the first year, but amortized over 60 months.

These costs were simply operating expenses which would have been fully deductible had the store been open for business.

My question for GAAP people -- are these expenses reportable as charges against the P&L in the first year, creating a timing difference in deferred taxes on the balance sheet?

[JG EA]

Here are a couple of articles that may or may not help:

http://www.journalofaccountancy.com/Issues/1998/Jul/accapps.htm

http://findarticles.com/p/articles/mi_m3257/is_8_53/ai_55471456/

But, they are kind of old.

[Gretel]

During a start-up period, Crossroads Sporting Goods incurred $20,000 in Start-Up Costs which cannot be deducted in the first year, but amortized over 60 months.

Keep in mind that $5,000 Start-Up costs can be deducted as expense.

[Corduroy Frog]

Example

Gretel, I assume you really meant $4000 ($20000/60 months).

Facts as given: $20,000 in operating expenses, that are classified as StartUp cost in the first year.

But we find out that the GAAP definition only includes costs that would have not occured except in the process of start-up. This definition is much more restrictive. Assume that only $6000 qualifies for StartUp amortization, and the GAAP financial statements amortize only $1200 instead of $4000 in the first year.

Here is what happens: Sch L, Balance Sheet on the 1120, shows GAAP numbers, not tax numbers. There is therefore $4800 in amortizable intangible assets, not $16000. Operating expenses are $14,000 more (20K minus 6K), and this becomes a Schedule M-1 reconciliation item. The amortization itself is $2800 LESS ($4000-$1200), and this ALSO becomes an M-1 reconciliation item.

It doesn't stop here if it is a C-corp. GAAP requires that the differential of tax expense due to timing items be carried in a Deferred Account. Assume a 25% tax rate. GAAP income is less by $13,200 (16,000 more operating expenses, -2800 less amortization) The amount carried in the deferred account is $3300 ($13200 X 25%). And this ALSO should show on Schedule L as a timing difference, to be readjusted every year.

Because Sch. L has to be reported on GAAP basis instead of tax basis, and because the first line item on the M-1 is "Income per books" (i.e. income per GAAP) it becomes necessary for tax preparers who do entity returns to familiarize themselves.

[Gretel]

Gretel, I assume you really meant $4000 ($20000/60 months).

Facts as given: $20,000 in operating expenses, that are classified as StartUp cost in the first year.

Snag, I am sorry, but cannot give any help on GAAP.

I meant $5,000. See TTB pg. 8-18.

[Corduroy Frog]

Quite correct - Gretel

Gretel you are correct. Looks like I know the GAAP side better than the tax side. I wouldn't doubt if my GAAP knowledge is dated as well.

Thanks