What Is an Amortization Deduction?

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 What Are Corporate Tax Rates?

Corporate tax rates refer to the taxes that businesses pay as registered corporations. These may differ for other forms of businesses, such as a sole proprietorship or partnership. Corporate tax rates also differ from the ones that individuals pay at the end of the year concerning their income.

Corporations are required to pay various taxes, including:

  • Income Tax: Dependent upon the corporation’s income figures;
  • Excise Tax: Taxes on goods such as fuel, alcohol, cigarettes, and other regulated items;
  • Real Estate Tax: Taxes on real property held by the corporation;
  • Franchise Tax: Paid to the state in which the company is incorporated; and
  • Payroll Tax: Taxes based on the company’s employment payrolls.

Various factors can influence the rates at which a corporation is taxed. These include, but may not be limited to:

  • State of Incorporation: Choosing where to incorporate can affect specific tax rates, especially the franchise tax that is paid to the state;
  • Business Activities: Non-profit corporations generally have different tax needs due to their involvement with charitable expenses and charitable giving. As such, they are taxed differently from for-profit enterprises; and
  • C vs. S Corporations: C corporations require the corporation itself to handle taxes, while S corporations require the shareholders to pay the taxes.

The top corporate tax rate in the U.S. reached a high of 53% in 1942. The tax rate was maxed out at 38% from 1993 until 2018. After the Tax Cuts and Jobs Act was passed in December 2017, the corporate tax rate changed to 21%.

What Are Corporate Tax Deductions?

Tax deductions are reductions of income that the government can tax. The purpose of tax deductions is to decrease a person’s taxable income, decreasing the amount of income tax that a taxpayer owes to the federal government. Numerous deductions reduce your taxable income available to businesses and individuals.

Corporations can reduce their taxable income by using certain business expenditures as deductions. Expenses required for the corporation’s operation are fully tax-deductible, as are investments and real estate purchased to generate income for the corporation.

Corporations can deduct:

  • Employee salaries;
  • Employee health benefits;
  • Tuition reimbursements; and
  • Bonuses.

Corporations can also reduce taxable income by deducting:

  • Insurance premiums;
  • Travel expenses;
  • Bad debts;
  • Interest payments;
  • Sales taxes;
  • Gas taxes; and
  • Excise taxes.

Other means of reducing business income include:

  • Tax preparation fees;
  • Legal fees;
  • Bookkeeping; and
  • Advertising costs.

What Is An Amortization Deduction?

Amortization is a way of deducting specific capital costs over a certain period of time. The concept applies to intangible property, such as goodwill, because it results in excess of a business’s purchase price over its net assets’ value. Goodwill specifically refers to a business’s reputation and is considered an asset.

The concept of amortization is similar to that of depreciation, which is a means by which you can recover the cost or basis of a tangible asset over the useful life of the asset. Another comparable concept would be depletion, which permits an owner to account for the decrease of a product’s reserves. Depletion is generally used in mining, timber, and petroleum industries.

Property Held For Use In A Trade Or Business And Start-Up Costs

According to tax law, amortization is explained in 26 U.S.C. §§197(c)(1) and 197(d) and applies to property that is held for use in a trade or business. Or for a property that is intended to produce income. According to §197, most intangible assets must be amortized over 15 years or roughly 180 months.

If you paid or incurred business start-up or organizational costs after September 8, 2008, you can deduct a certain amount of those costs from your taxes. The costs that are not deducted can be amortized over 180 months. More specifically, you can amortize the following business start-up costs:

  • The amount that you paid or incurred when creating a trade or business; or
  • The amount that you paid or incurred in your investigation of the formation or acquisition of a trade or business.

Start-up costs are amounts paid or incurred concerning an activity with a profit motive and regarding the production of income in expectation of a change in the activity to an active trade or business. However, the expenses you incur when buying a certain business are considered capital expenses, meaning that you are not allowed to amortize them.

Start-up costs are amortizable when they are costs that you can deduct if they were paid or incurred to operate a current active trade or business in the same practice area as the one in which you entered. You can also deduct them if they are costs that you paid or incurred before the day on which your active trade or business began.

Qualifying start-up costs also include the following:

  • A study or survey of possible markets, products, and sources of labor;
  • Marketing activities intended to advertise the start date of the business;
  • Employees’ salaries and wages;
  • Salaries and wages of employees’ instructors;
  • Costs of travel for obtaining potential distributors, suppliers, or clients; and
  • Salaries paid to executives and consultants.

The following expenses are excluded from start-up costs:

  • Deductible interest;
  • Taxes; and
  • Product research and experimental costs.

If you dispose of your business before the conclusion of the amortization period, you are allowed to deduct any deferred start-up costs that are outstanding. However, you are permitted to deduct such deferred start-up costs only to the degree to which they are eligible to be a loss from your business.

Amortizable Organizational Costs And Deciding To Amortize

The direct costs that are incurred in forming a corporation are considered to be amortizable organizational costs. To be eligible as an organizational cost, it must be:

  • For the formation of the corporation;
  • Able to be charged to a capital account;
  • Amortized throughout the life of the corporation provided that a fixed life marked the corporation; and
  • Incurred before the end of the initial tax year in which the corporation is an active business.

A corporation that utilizes the cash method of accounting can amortize costs that arise in the initial tax year, even if those expenses remain unpaid in that year. Some organizational costs that can be amortized are:

  • The cost of having temporary directors;
  • The cost of arranging organizational meetings;
  • State incorporation fees; and
  • Expenses incurred for obtaining legal services for the business.

Among the organizational costs that cannot be amortized are expenses incurred in the issue and sale of stock or securities. Specifically, such costs include commissions, professional fees, and the cost of printing services. This also includes expenses incurred in transferring assets to the corporation.

To make the election to amortize your start-up or organizational costs, you must complete and attach to your tax return Form 4562 for the initial tax year in which your company is an active business.

Do I Need A Lawyer For Help With An Amortization Deduction?

If you are starting a business and are concerned about amortizing your start-up or organizational costs, you should consult with a tax attorney.

An attorney can help you determine which costs you can amortize and can assist you with any legal issues that arise with amortizing certain costs. Additionally, an attorney can also represent you in court as needed.

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