Question

6. LO.4 What types of expenditures might a new partnership incur? How are those costs treated for Federal tax purposes? In the chart below, for each expenditure listed, select the tax treatment for that expenditure and the applicable Code section requiring this treatment

Answer 1

You can include expenses that meet the following three conditions:

• They must be directly related to the creation of the corporation
• They must be of the type that would be chargeable to a capital account
• If the expenses are related to the creation of a corporation having a limited life, they must be of a character that would benefit the corporation over its entire life

FOR EXAMPLE : costs of issuing shares of stock, such as commissions, professional fees, and printing costs.

Expenses incurred in preparing to open a new business are deducted over 180 months, rather than all at once as they would be if the business were already operating. Typical costs include investigating whether to open a business, ordering supplies needed, and training employees.

If your startup expenditures actually result in an up-and-running business, you can:

• Deduct a portion of the costs in the first year; and
• Amortize the remaining costs (that is, deduct them in equal installments) over a period of 180 months, beginning with the month in which your business opens.

It's usually best to claim the 60-month amortization deduction as early as possible if there is any doubt about when your business begins. If the IRS determines that your business began in a year before the election to amortize start-up costs is made, the right to deduct these costs in the earlier year will be lost.