To join in on this discussion, you must first log in.

Discussion:Organizational costs

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Organizational costs


Discussion Forum Index --> Tax Questions --> Organizational costs

Bell (talk|edits) said:

12 March 2014
Had a client today that wanted to deduct organizational costs for setting up his S-Corp. I told him they are taken on the S-corp return and will flow to him on a K-1. He just formed the S-Corp in November of 2013 and has done no business. Should he file an 1120-S for 2013? Not my arena, but he seems to think he need not file. I know they are due 3/17 this year.

Terry Oraha (talk|edits) said:

12 March 2014
The form 2553 has a box E to indicate the first tax year that the s election should start. So maybe your client made an s election starting 1/1/14 and not 11/2013.

If that's the case what elected a c corp or a smllc? A C corp would have had a filing requirement, but a smllc could have deducted those amounts, or would it have to capitalize them? hmmm. I say deduct.

Marcilio (talk|edits) said:

13 March 2014
Is the company open for business? If not, the org expenses aren't currently deductible. Sometimes people open the doors for business and nobody walks in. That makes the expense deductible (subject to §195 rules). .

Ckenefick (talk|edits) said:

13 March 2014
Do note the Org Cost standard (248/709) is lower than the Start-up Cost standard (195)...as the latter uses the word "active."

Coddington (talk|edits) said:

13 March 2014
The lack of "active" doesn't make much of a difference:

"Treas. Reg. 1.248-1(d) Determination of when corporation begins business. The deduction allowed under section 248 must be spread over a period beginning with the month in which the corporation begins business. The determination of the date the corporation begins business presents a question of fact which must be determined in each case in light of all the circumstances of the particular case. The words “begins business,” however, do not have the same meaning as “in existence.” Ordinarily, a corporation begins business when it starts the business operations for which it was organized; a corporation comes into existence on the date of its incorporation. Mere organizational activities, such as the obtaining of the corporate charter, are not alone sufficient to show the beginning of business. If the activities of the corporation have advanced to the extent necessary to establish the nature of its business operations, however, it will be deemed to have begun business. For example, the acquisition of operating assets which are necessary to the type of business contemplated may constitute the beginning of business."

See also McManus v. Comm'r, T.C. Memo 1987-457 (holding that regular and active involvement in the trade or business is required for it to have commenced).

Ckenefick (talk|edits) said:

13 March 2014
It's pretty fact intensive. I've always been pretty aggressive with it. Service based business have a better argument than McManus, who was manufacturing equipment for rental purposes. And, I think functioning as a going concern (Sec 195, Richmond Television) involves a higher level of activity than some of the language included in the 248 Reg, like this:

If the activities of the corporation have advanced to the extent necessary to establish the nature of its business operations, however, it will be deemed to have begun business. For example, the acquisition of operating assets which are necessary to the type of business contemplated may constitute the beginning of business

Yet I agree that if all the guy did in the OP was incorporate, that's not enough under any interpretation.

Ckenefick (talk|edits) said:

13 March 2014
I should also point out that the "active" language in 195 was quite intentional, as 195 is very much related to 162. 248 and 709, on the hand, don't really have the Sec 162 connection.

Coddington (talk|edits) said:

13 March 2014
I think we're agreeing, but looking at it in different ways. I see it as a low bar when you want a high bar and vice versa.

Bell (talk|edits) said:

13 March 2014
As always, you are all so helpful. Thank you. This guy did file his F2553 timely. However, he has not gotten acceptance from the IRS to be a S Corp, yet.

All he had was $450 of incorporating fees. I understand that he cannot deduct them until he actually begins business in 2014. Do I file anything for 2013? In NC, there are Franchise and Corp taxes due each year of $60 total. Are those due for 2013? If yes, I will need to file. Hope someone in NC is out there.

Ckenefick (talk|edits) said:

13 March 2014
Yes, file the CD-401S and pay the $60.00. Otherwise, they'll come back in 5 years and ask for it.

And you ought to file the Fed, too.

Ckenefick (talk|edits) said:

13 March 2014
...and the CD401S is due on 4/15, not 3/17.

Michaelstar (talk|edits) said:

13 March 2014
Agree with Chris - he is absolutely 100% correct. One starts filing tax returns even if only to report zero activity from the date of incorporation.

Ckenefick (talk|edits) said:

13 March 2014
It's statutory for an S under Sec 6037...-2 of 6012 also speaks of required S and C filings...Although someone posted something recently about the limited exception for not having "perfected" an entity's organization...which is under the same Reg.

Spell Czech (talk|edits) said:

14 March 2014
All of this is about the corporation, right? The organizational costs are the corporation's organizational costs, the S election is the corporation's S election, the tax return is the corporation's tax return, and the start of business is the corporation's start of business, right?

To join in on this discussion, you must first log in.
Personal tools