Capitalized Expenses

[Bonnie]

I am reading in IRS Publication1120S Instructions on page 14 and it says, "Business start-up and organizational costs must be capitalized unless and election is made to deduct or amoritize them. Can someone please explain to me what the difference is between capitalized and amoritized. This is my first 1120S and I am not understanding these terms.

Thanks for any help anyone can give me.

Bonnie

[OldJack]

You capitalize something to write it off over a period of years. You write it off either by amortizing (usually expenses) or depreciating (usually tangible assets) it (both terms meaning basically the same thing) depending upon the type of item involved.

Flowing from a form to the tax return, depreciation is first on form 4562, page 1, and amortization is on form 4562, page 2, bottom of the form. Depreciation usually has a printed line item on the tax return (ie: Sch-C) whereas amortization is on a schedule attached to a miscellaneous line item on the tax return.

[jainen]

expenses are capitalized

>>please explain to me what the difference is between capitalized and amoritized<<

When expenses are capitalized they are treated as an asset instead of deducting them in the year they are paid. The asset is listed on the company's books until it is disposed of, at which time gain or loss is calculated. Amortization, like depreciation, is a way of pro-rating the expense over a rather arbitrary lifespan.

Certain assets are eligible for depreciation, which under current law is MACRS cost recovery. This may be "accelerated" to shift most of the deduction into the early years, or straight-line for a steady deduction. Other assets are eligible for amortization, which is another form of straight line.

Unless the formal election is made, startup expenses are not eligible for expensing, amortization or depreciation. The deduction would be taken when the business is sold, if ever.

[Bonnie]

[

Unless the formal election is made, startup expenses are not eligible for expensing, amortization or depreciation. The deduction would be taken when the business is sold, if ever.[/QUOTE]

How do you make the formal election? The expenses are for a Coffee Shop/Restaurant and were the expenses to basically remodel the building being rented in order to open the business. $29,000+ of remodeling expenses. There was also a lot of equipment, furniture, etc in addition to the remodeling expense that I have done depreciation for.

Thanks for the help.
Bonnie

[jainen]

None of that

>>equipment, furniture, etc in addition to the remodelin<<

None of that is startup expense. Startup expenses are operating costs that would be deductible if they were incurred during the conduct of a trade or business, things like rent and advertising and supplies. The expenses you describe would be depreciated in the normal way starting when they are put in service, presumably the first day of business.

You make the election by attaching a statement to the return. Check The Tax Book for details about what is covered, what to say, and when to file it.

[Bonnie]

[QUOTE=jainen;35012]>>equipment, furniture, etc in addition to the remodelin<<

None of that is startup expense. Startup expenses are operating costs that would be deductible if they were incurred during the conduct of a trade or business, things like rent and advertising and supplies. The expenses you describe would be depreciated in the normal way starting when they are put in service, presumably the first day of business.


So I would list this as remodeling expense under depreciation witht the amount of $29,000?

Thanks
Bonnie

[S T]

See Tax Book

Take a look at TaxBook on pages 24-10 there is a an organizational and start up costs Amortization Election Statement.

Also go to page 8-17-8-18 there are the items that are included for either start up or organizational costs and the elections.

Your remodel will more than likely be leasehold improvements (not startup)

Equipment is another depreciable category (not startup)

Furn\Fix is another depreciable cateogory. (not startup)

You make the election for any "eligible" startup expenses on this years return (2006) if that is when it was incurred. You should have somewhere in your software to initiate this election.

Sandy

[Bonnie]

[QUOTE=S T;35015]Take a look at TaxBook on pages 24-10 there is a an organizational and start up costs Amortization Election Statement.

Also go to page 8-17-8-18 there are the items that are included for either start up or organizational costs and the elections.

Yes, I had already read all of this. I just went back and re-read it. I didn't think the remodeling expense fit the catagory of start up costs and after reading again, I still don't really feel they are start up costs. Just don't know where to put them. Everything else I know what to do with.

Thanks
Bonnie

[jainen]

the end of the lease

>>don't know where to put them<<

As Sandy said, they are leasehold improvements. You can keep calling them remodeling expenses if you prefer. Depreciate as commercial real estate (non-residential, 39 year property). Deduct the balance when they abandon the improvements at the end of the lease.

[S T]

Remodeling

Your remodeling expenses should probably be broken down into the depreciable asset categories.

If leasehold, moving walls, installing walls, etc, would be leasehold improvements. See TB page 9-1 and 9-17

carpet and flooring could probably be under the 5 year.

Furniture and fixtures would be 7 year

Etc.

None of the remodel or related expenses would be startup or organizational.

Page 8-17 has a list of what is qualifed for either start up or organization expenses.

Sandy

[S T]

Wasn't there a change

Jainen,

Leasehold Improvements for 2006 wasn't the provision extended to depreciate over 15 years rather than 39, if placed in service prior to 12/31/07???

Sandy

[Bonnie]

>>don't know where to put them<<

As Sandy said, they are leasehold improvements. You can keep calling them remodeling expenses if you prefer. Depreciate as commercial real estate (non-residential, 39 year property). Deduct the balance when they abandon the improvements at the end of the lease.

Thanks that makes sense and now I know the correct terminology to call them. I appreciate everyone's help.
Bonnie

[jainen]

I keep forge

>>depreciate over 15 years rather than 39<<

I keep forgetting that. Thanks.