Question

Question 13 of 30.

A partnership may elect to expense organizational or startup expenses rather than amortizing these expenses. How much are they allowed to expense?

Up to $500 of each of the organizational and startup costs.

Up to $5,000 total for startup costs and organizational costs.

Up to $5,000 of each of the organizational and startup costs.

Up to $5,000 of startup costs only may be expensed, but organizational costs must be amortized.

Answer 1

Answer : Up to $5,000 total for startup costs and organizational costs.

Explanation for the answer below:

Start-up Costs : You may elect to deduct up to $5,000 of start-up costs in the year your business begins operations. The $5,000 first-year deduction limit is reduced by the amount of start-up costs exceeding $50,000.

Start-up costs that exceed the first-year limit of $5,000 may be amortized ratably over 15 years. The amortization period starts with the month you begin operating your active trade or business.

Start-up costs include amounts paid for the following:

• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertisements for the opening of the business.
• Salaries and wages for employees who are being trained and their instructors.
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
• Salaries and fees for executives and consultants, or for similar professional services.

Organization Costs for a Partnership or Corporation : Costs related to the creation of a partnership or corporation are also deductible or amortizable under the same rules for start-up costs discussed above.

Partnerships: Qualifying costs may include items such as, legal fees for negotiating and preparing a partnership agreement, management fees, consulting fees, accounting fees in setting up the partnership. You may not deduct or amortize syndication costs of issuing and marketing partnership interests, such as brokerage and registration fees, underwriting fees, and costs of preparing a prospectus.

How to Claim Start-up Costs

You claim the deduction for start-up costs in Part V of Schedule C ("Other Expenses"). Any excess amount over the first year limit of $5,000 must be amortized over 15 years (180 months). An election to amortize the excess over $5,000 is made by claiming the deduction on Form 4562, Part VI.

On Form 4562, Part VI:

1. Enter the amortization amount on line 42.
2. Column (d) asks for the Code section; enter 195. This is the Internal Revenue Code Section for Start-up Expenditures.
3. Add lines 42 and 43 in column F. The total is entered on line 44.
4. The total amount on line 44 is entered in Part V of Schedule C, "Other Expenses".

Schedule C, Line 27a:

• The total amount in the "Other Expenses" section of Schedule C, Part V, line 48, is carried to Line 27a of Schedule C.