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Sec. 195 election procedures.

On Jan. 12, 1998, the IRS published proposed regulations to provide guidance on the election to amortize start-up expenses under Sec. 195.

These proposed regulations are intended to simplify, the filing of Sec. 195 elections in two ways. First, a taxpayer that is uncertain as to the year in which the active trade or business begins need not file an election for each possible tax year. Rather, a Sec. 195 election for a particular trade or business will be effective if the trade or business becomes active in the year for which the election is filed or in any subsequent year. Second, the proposed regulations also allow taxpayers that have made timely elections under Sec. 195 to file a revised statement with a subsequent return to include any start-up expenditures not included in the original statement.

Sec. 195 provides that no deduction is allowed for start-up expenditures unless the taxpayer elects to amortize the expenditures. If the taxpayer elects to amortize start-up expenditures under Sec. 195(b)(1), the costs are amortizable over a period of not less than 60 months beginning with the month in which the active trade or business begins. Under Sec. 195(d), an election to amortize start-up expenditures must be made not later than the filing date for the tax year in which the active trade or business begins (including extensions thereof).

An expense is a start-up expenditure if it satisfies two conditions. First, the expense must be paid or incurred in connection with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or any activity entered into for profit and for the production of income before the day on which the active trade or business begins, in anticipation of the activity becoming an active trade or business.

Secondly, the expenditure must also be of the type that, if paid or incurred in connection with the operation of an existing active trade or business in the same field as that being entered into by the taxpayer, would be allowable as a deduction for the tax year when paid or incurred.

Making the Election

Under Prop. Regs. Sec. 1.195-1, a taxpayer electing to amortize start-up expenditures must, at the time of election, select an amortization period of not less than 60 months, beginning with the month the active trade or business begins. This irrevocable election applies to all of the taxpayer's start-up expenditures.

The election should be made by attaching a statement containing the following information to the taxpayer's return:

1. Description of the trade or business to which it relates, with sufficient detail so that expenses relating to the trade or business can be identified properly for the tax year in which the statement is filed and for all future tax years to which it relates.

2. Description of each start-up expenditure incurred (whether or not paid).

3. The month when the active trade or business began (or was acquired).

4. The number of months (not less than 60) over which the expenditures are to be amortized.

A revised statement to include any start-up expenditures not included in the taxpayer's original election statement may be filed with a return filed after the return that contained the original election.

The statement must be filed no later than the filing date for the return (including extensions) for the tax year in which the active trade or business begins. The statement may be filed with a return for any tax year prior to the year in which the taxpayer's active trade or business begins, but no later than the filing date for the year in which the active trade or business begins.
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Title Annotation:Internal Revenue Code section 195
Author:Jacobs, Jennifer
Publication:The Tax Adviser
Article Type:Brief Article
Date:Apr 1, 1998
Words:613
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