Reconciling Book/Tax Treatment of Startup Costs: Deferred Tax Assets and Liabilities, Schedules M-1 and M-3, Partnership Provisions

Description

An often significant challenge for tax advisers is properly calculating and reporting the differences in treatment of business organization costs between financial accounting standards and tax requirements. For book purposes, startup costs (also referred to as pre-operating costs or organization costs) are treated in a straightforward manner and are deducted as incurred. For tax purposes, however, these costs must be broken out into separate subcategories, many of which incur different tax treatment than straight expense deductions.

There are several provisions in the Code that specify how certain expenditures classed as startup costs must be treated for tax purposes. The basic framework for reporting “start-up expenditures” is found in Section 195, which defines startup costs as any amounts incurred to either investigate the potential of creating or acquiring an active trade or business, or in actually creating an active trade or business.

Section 195 also provides the option to elect and amortize startup costs, and sets the limits for those deductions. Additionally Section 197 offers guidance on how to treat intangibles related to business startups. The disparate book/tax treatment of startup costs requires tax advisers to maintain separate schedules to report on Schedule M-1 or Schedule M-3 of the Form 1120 tax return.

There are also differences in the Code for handling partnership startup expenses, with IRC 709 setting rules for dealing with partnership syndication costs as a component of start-up expenditures. Partnership advisers need to especially understand the differences in deductibility of unamortized costs in a partnership termination before the amortization period expires.

Listen as our experienced panel provides a comprehensive look on reconciling the book/tax treatment of startup costs.