Q-1:

Subject: blog question

 

I invested in a startup S corp about four years ago.  So far there has been no income and there is still hope of getting a lucrative government contract

sometime in the future.  The company has incurred lots of expenses in trying to get it going but the tax form, K-1 shows no losses.  The accountant says

they are capitalizing everything as start up costs.  Can they take a more aggressive posture and under what circumstances? I know my loss is limited to my investment.

A-1:

There is a quite a bit of flexibility in deciding which exact costs are capitalized as pre-operations start-up costs, to be amortized in future years, and currently deductible operating costs.  All of the shareholders should consult with the corp's tax accountant to establish a policy that you can all agree on for handling the different kinds of expenditures.

I just consulted my favorite reference, TMI's The TaxBook, and it has a good summary of the rule that allows S corps to elect to deduct up to $5,000 of organizational costs plus $5,000 of start-up costs, with the excess amortized over 180 months.  The actual statement (on page 24-10) shows that these deductions are to be reduced dollar for dollar by the amount total start-up or organizational costs exceed $50,000.  You and your fellow shareholders should check with the corp tax accountant to see if this would apply in your case.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,  Thanks for your response.  To clarify, this business depends on getting a government contract.  Most of the dollars have been spent on

consultants and paperwork to get the contract.  These would seem to be operating costs rather than organization costs.  Could the shareholders

agree on writing these off before getting the contract?

A-2:

There is some flexibility in regard to what costs have to be capitalized and held off to be amortized against future income.  However, there are fewer options with this when you aren't producing any income at all.  If you were making a lot of small sales while building up for the big payoff from the anticipated government contract bonanza, you would have a better rationale for deducting more as current operating costs than would be the case if the only money your business is ever expecting to ear is that future contract. 

You should all coordinate with your professional tax advisor on how you all feel comfortable in booking the various kinds of expenditures you have.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your advice.  Unfortunately you seem to agree with the company's tax preparer.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 11:26:00 AM Send this post: