Expenses Attributable to Forming an Entity

Incorporation Expenses A corporation may elect to deduct up to $5,000 of any organizational expenses it incurs in the tax year in which it begins business. Note, that the IRS assumes that you will want to deduct and amortize your incorporation costs. So, if you don't wish to do so, you will need to file a statement clearly electing to capitalize the organizational expenditures on the corporate tax return for the year you incurred the expenses. The rules for incoporation expenses are the same as for start-up expenses: there is a maximum annual deduction of $5,000 deducted which must be reduced by the amount by which the expenses exceed $50,000. Any remaining balance of organizational expenditures which are not immediately deductible must be amortized over a 180-month period.

Requirements. Which types of expenditures should you include? 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.

Examples of expenditures that can be deducted include:

• legal and accounting fees to obtain the corporate charter
• legal fees for drafting the charter, by-laws, minutes of organizational meetings, and the terms of original stock certificates
• fees paid to the state of incorporation
• expenses of temporary directors

What can't be deducted. Expenses connected with issuing or selling stock or with the transfer of assets to a corporation are not amortizable; instead, these costs must be netted against the proceeds of the stock sale. Preopening or startup expenses, such as employee training, advertising, and expenses of lining up suppliers or potential customers, are not organizational expenses, but may be amortizable as start-up expenses. Likewise, corporate expenditures that are incurred in investigating the creation or acquisition of an active trade or business or in creating such a trade or business do not qualify for amortization as organizational expenses, but may qualify as start-up expenses

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