Amortization of start-up costs.

The IRS just released final regulations, effective for elections filed on or after Dec. 17, 1998, providing rules and procedures for electing to amortize start-up expenditures under Sec. 195. Sec. 195 generally provides that no deduction is allowed for start-up expenditures unless a taxpayer elects to amortize them over a period of not less than 60 months, beginning with the month in which the active trade or business begins.

The taxpayer must attach the election statement to his income tax return. The election must be filed no later than the due date for the income tax return (including extensions) for the tax year in which the active trade or business begins. Thus, under the final regulations, a taxpayer may file an election in any tax year prior to the year in which his active trade or business begins; such election becomes effective in the month of the year in which the taxpayer's active trade or business begins.

A revised statement may include any start-up expenditures not included on the original election, but it may not include any expenditures for which the taxpayer had previously taken a position on a return inconsistent with their treatment as start-up expenditures (e.g., deducted as a period cost on the original tax return). The revised statement may be filed with a return filed after the return that contained the election.

The election should still contain the following information:

* A description of the active trade or business in sufficient detail so that the expenses relating to the trade or business can be properly identified;

* The number of months over which the amortization is to take place (not fewer than 60 months);

* To the extent known at the time the statement is filed, a description of the start-up expenditures incurred (whether or not paid); and

* The month in which the active trade or business began or was acquired.

The final regulations put to rest the argument that a protective election can be filed to amortize expenses that the Service might disallow on audit. If a taxpayer originally expenses organization expenses in a return, such expenses are precluded from being amortized.

FROM JON E. DAVIS, CPA, CFP, SIOUX FALLS, SD