When a taxpayer creates a corporation, he/she will incur costs such as drafting up charters and bylaws, issuing and selling stocks, and registering in the state of incorporation. Only costs that are considered "organizational costs" may be amortized over a period no less than 60 months beginning with the month in which the corporation begins its business.
Organizational costs are defined as expenditures that are:
(1) Incident to the creation of a corporation,
(2) Chargeable to capital account, and
(3) Of a character that, if expended to create a corporation with a limited life, would be amortizable over that period.
Examples of Organizational Costs Include:
- Legal services incident to the creation of the corporation, such as drafting of charters, bylaws, and minutes of meetings;
- Necessary accounting services;
- Fees paid for temporary directors and organizational meetings; and
- Registration fees paid to the state of incorporation.
What Kinds of Expenses Are Not Considered Organizational Costs?
Fees associated with the issuance and sale of corporate stocks are not considered organizational costs. These include printing fees, broker commissions, and related professional fees.
Expenses in connection with the transfer of assets to the corporation are also excluded from being organizational costs. These include title searches, recording documents, and transportation. These expenses are usually added to the basis of the assets themselves.
Fees for issuing debt are also not treated as organization cost, but they may be capitalized and amortized over the life of the debt as interest expense.
How Does the Corporation Take a Deduction for These Organizational Costs?
The corporation must make an election to amortize these expenses over a period no less than 60 months in its first tax return. Otherwise, these costs must be capitalized and cannot be deducted until the corporation is dissolved.
Can Shareholders Deduct Organizational Costs They Incurred Themselves?
No. These costs must be added to the basis of the stocks that they receive from the corporation.
Do I Need an Attorney to Help Me with My Tax Problems?
Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about the characterization of your expenses or you need someone to represent you before the IRS, a tax attorney can help you.