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Washington Tax Alert - July 8, 2008 - Start-up and organizational expenditures

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
July 8, 2008

The Service issued temporary regulations yesterday under IRC §§ 195, 248 and 709 relating to the deduction and amortization of start-up and organizational expenditures. Statutory changes made in 2004 permit up to $5,000 of these expenditures to be deducted in the taxable year in which the taxpayer begins an "active trade or business" (in the case of start-up expenditures) or begins "business" (in the case of organizational expenditures), subject to certain limitations.

The new temporary regulations indicate that taxpayers may request changes in methods of accounting where expenditures are misclassified, or where the taxpayer incorrectly determines the taxable year in which its business begins. Therefore, a change in the characterization of an item as a start-up or organizational expenditure is a change in method of accounting if the taxpayer has treated the item consistently for two or more taxable years. Similarly, a taxpayer may change its tax accounting for start-up and organizational expenditures if it has filed tax returns for two or more years based on an erroneous determination of the taxable year in which it began business.

The new temporary regulations are effective for expenditures paid or incurred after September 8, 2008, but taxpayers are permitted to apply the new regulations to start-up and organizational expenditures paid or incurred after October 22, 2004, assuming the statute of limitations has not expired for the taxable year in which the taxpayer began business.