Organization Costs and Start-Up Costs Amortized Over 15 Years

At the election of the taxpayer, start-up expenditures and organizational expenditures may be amortized over a period of not less than 60 months, beginning with the month in which the trade or business begins. Regulations require a taxpayer to file an election to amortize start-up expenditures no later than the due date for the tax year in which the trade or business begins. Further, Sec. 197 requires most acquired intangible assets (e.g., goodwill, trademarks, franchises and patents) held in connection with the conduct of a trade or business or an activity for the production of income, to be amortized over 15 years, beginning with the month in which the intangible was acquired.

New Law

AJCA Section 902 modifies Secs. 195s, 248s and 709s treatment of start-up and organizational expenditures. A taxpayer can elect to deduct up to $5,000 of start-up and $5,000 of organizational expenditures in the tax year in which the trade or business begins. Each $5,000, however, is reduced (but not below zero) by the amount by which the cumulative cost of start-up or organizational expenditures exceeds $50,000. Start-up and organizational expenditures not deductible in the year in which the trade or business begins are amortized over a 15-year period consistent with the amortization period for Sec. 197 intangibles.

Effective Date

This provision is effective for start-up and organizational expenditures paid or incurred after Oct. 22, 2004. Start-up and organizational expenditures incurred before Oct. 23, 2004, continue to be eligible to be amortized over a period not to exceed 60 months. However, all start-up and organizational expenditures related to a particular trade or businesseven if incurred before Oct. 23, 2004are considered in determining whether the cumulative cost of start-up or organizational expenditures exceeds $50,000.

Implications

Small taxpayers will benefit from the de minimis deduction election. Other taxpayers will need to be more cognizant of when a trade or business begins for Sec. 195 purposes, given the 10-year increase in the amortization period. Also, due to the effective date, taxpayers that incur organization or start-up costs in 2004 may need to make two electionsone under the old law and one under the AJCA.

From Jane Rohrs, Washington, DC