A deductible start-up cost includes the amount you pay to create or investigate the creation or purchase of a business. Common examples include fees you pay to survey potential markets, marketing the opening of the business, the cost of training employees, payments to professional consultants and travel expenses that relate to these activities.
Qualifying organizational expenses are the costs you incur to designate the business as a LLC. This includes the cost of hiring attorneys to draft and negotiate LLC membership agreements, accounting fees and other expenditures that directly relate to filing documents with state agencies. Costs that do not qualify include soliciting investors and hiring attorneys to draft potential customer contracts.
Start-up and organizational costs are capital expenditures subject to amortization rules that require you to take deductions over the 180-month period that begins when the LLC commences operations. However, taxpayers are free to choose an alternative amortization period provided it is not shorter than 180 months. The amortization deduction for start-up and organizational costs is not automatic. A member manager of the LLC must make an election to deduct these costs. The IRS requires you to complete Form 4562 and attach it to the first tax return you file that includes the LLC’s activities. You must also attach a statement to Form 4862 that includes a description of the business and each start-up cost for which you are electing amortization, the date the LLC became operational and the amortization period you are choosing. You must complete a separate statement if also electing to amortize organizational costs.
The federal tax law allows the members of an LLC to elect to deduct the full amount of start-up and organizational costs in the first year of business operations, with the remainder subject to amortization. The IRS limits the deduction to $5,000 of start-up and organizational costs. However, you must reduce the deduction by an amount of total costs that exceed $50,000. Any amount not eligible for the accelerated deduction in the first year is amortizable. For example, if you incur $53,000 of start-up and organizational costs, you can deduct $2,000 in the first year, with the remaining $51,000 deductible over the relevant amortization period. To accelerate the deduction of costs, you must make a valid election by including the deduction on the LLC’s initial tax return and filing it by the due date.