Start Up Cost..Section 195

[AZ-Tax]

Picked up a restaurant this year that began in 2007. Section 195 states max $5000 start up cost and the remaining to be amortized as I understand the Section. If I elect to Section 179 all his assets he purchased, only 50% is allowed due to “income limitations” so obviously I can amortize the assets out but it’s the current exps like wages, advertising that exceed $5,000. Any idea how I do this? Is there a Section 195 checklist?

[Bees Knees]

Don’t confuse start up costs with depreciable assets. You can’t elect 179 on start up costs, and you can’t include depreciable assets in the first $5,000 of start up costs. The two are different.

Depreciable assets are things that have a life greater than one year. You write off the cost through depreciation in the year they are placed in service, even if that year is prior to the start of the business.

Start up costs are expenses that normally would be deducted at the time the expenses are incurred, except for the fact that the expense is incurred prior to the start of business. Start up costs can only be deducted after the business start date.

[AZ-Tax]

section 195

Bees Knees, if am I understanding you correctly that the $51K of depreciating assets (all purchased in 07 and amortized), the 1st year depreciation is NOT included in the $5,000 of start up cost?

So what about all the other exps outside of assets that were paid out in 2007 like wages, advertising etc. that total about $60,000 that was paid in 2007?

Is there a cap of $5,000 with the rest being amortized over 15 yrs?

My ProSeries software says this; The $5,000 amount is reduced by the amount which total start-up cost exceed $50,000.

What exactly does that mean?

[Bees Knees]

Thats what I said. Depreciation is not a start-up cost.

As to the $50,000 rule, all that does is reduce the $5,000 that you can take currently.

TTB, page 8-18 says:

Amortization Election
For costs paid or incurred after October 22, 2004, a taxpayer can
elect to deduct up to $5,000 of organizational costs and up to
$5,000 of business start-up costs as a current deduction in the
year the active trade or business begins. The $5,000 deduction is
reduced dollar for dollar by the amount total start-up or organizational
costs exceed $50,000. Any remaining costs that cannot be
deducted currently are amortized ratably over 180-months.
When amortization period begins. The amortization period for
deducting organization costs and start-up costs begins on the
first day of the month the active trade or business begins.

Example: Armando opened the doors to the public
for his new restaurant on April 27, 2007. Start-up
costs incurred between November 22, 2006
(when he first started planning for the restaurant)
and April 26, 2007 (when final preparations
were complete) total $9,500. The first $5,000 of
start-up costs is currently deductible in 2007.
The remaining $4,500 is amortized over 180
months ($25 per month) starting April 1, 2007.

[AZ-Tax]

TTB - Sole Prop tab....start up & org exps....

Unless I missed something in this section, I did not see anything relating to the Section 195 start up & org exps. Is a start up business who files a Schedule C also subject to the start up & org exps limitations as spelled out in Section 195?

[BHoffman]

Yes the Sec 195 limitation still applies. What you are identifying as start up costs might be the question.

Sounds like you're talking about 3 "sets" of issues:

Depreciation, including Sec 179 - this would apply to capital assets.

Startup costs - see TTB pg 8-17. Make sure you understand the difference between start up costs and regular operating expenses. Advertising the OPENING of the new business is a startup cost. Wages paid to employees for TRAINING are startup costs. Legal and accounting fees paid to set up the business would be typical startup costs.

Ordinary expenses - Advertising and wage expense paid in the normal course of business would be ordinary expense. Legal and accounting fees paid for regular services (not to set up the company) would be ordinary expense. Once the doors are open to the public, the expenses incurred usually become ordinary and are not startup expenses. You have "started up".

Does that help?

[AZ-Tax]

Bee Knees

I think maybe these are my last set of questions:

Exps labeled as Start up and Organizational exps (exps like advertising incurred prior to business opening) are subject to the section 195 limitations? Correct.

If so if the business had $30,000 of start up exps and $30,000 of organizational exps, only a combined total of $10,000 of start up exps ($5,000) and organizational exps ($5,000) can be deducted in the tax year with the remaining $50,000 being amortized over 15 yrs beginning the date business opened. Correct?

One question that is still confusing to me is the $5,000 allowance is reduced by the amount of cumulative start up or organizational exps in excess of $50,000. Can you use the above example to explain how that calculates?

Ordinary exps incurred on or after the business opening date (exps like continued advertising) are not subject to the section 195 limitations therefore if these exps exceed $5,000 to lets say $7,000, all $7,000 can be deducted in tax year (no amortizing). Correct?

All business assets purchased in tax year need to be amortized (do not qualify for sec 179) and are NOT included in the start up and org exps? Correct?

Thanks you very very much

[BHoffman]

Fellow Arizonian

If you'll accept suggestions from someone in addition to Bees Knees, I'll offer the following to my fellow Arizonian:

1. Startup costs are subject Sec 195 limitations. Organizational costs are subject to Sec 248 limitations. See the worksheet on pg 24-10.

2. The $5000 available for startup and the $5000 available for organization is in addition to the amount of regular amortization, at least that's how my software is calculating it.

3. The reduced allowance applies if the Startup costs are over $50k AND the Organizational costs are over $50k. Doesn't look like you have that problem.

4. Ordinary expenses are not subject to Sec 195 or Sec 248 so you are correct.

5. All business fixed assets purchased in the tax year need to be capitalized and depreciated and are not amortized. Sec 179 is probably available for these assets, but that would depend on a few factors - like whether the restaurant was already a going business and whether your client purchased stock or purchased assets from the previous owner. Fixed assets are not a part of Startup or Org costs. Also, see pg 9-20 for special depreciation available for qualified restaurant property. This would be for your future consideration because of the 3 year rule.