Recent Developments

Summary:

When costs are incurred to start a new business,  or restructure a business, there are
several options for how these costs may be treated for tax purposes. Costs that
benefit a future period generally cannot be deducted currently (they’re
capitalized). Exceptions exist. A recent private letter ruling clarified some
issues as to the appropriate tax treatment. First the background.

● Sec 165: If a business fails the costs incurred may be deducted as a loss
under Code Section 165 if the proposed endeavor is abandoned. Rev. Rul. 73-580.
Costs to determine whether to enter a new business, and which one to select,
are generally investigatory costs that are start-up expenses under Code Sec.
195 . Rev. Rul. 99-23.

● Sec. 195: Start-up
costs are incurred to investigate, acquire, or create an active business before
the date on which business begins. Rev. Rul. 99-23. These are costs incurred after
the investigatory process has determined that a particular business should be
bought or set up, but before the business actually begins. Examples include
advertising costs, fees paid to consultants, and professionals, etc.

●Sec. 248: Organizational costs are expenses incurred in
forming a corporation. These are incident to its creation, chargeable to
capital, and of a type that, if the corporation had a limited life they would
be amortized over that life IRC Sec. 248(b). Examples include attorney fees (to
draft bylaws, articles, minutes), accounting fees, organization meeting of
directors and shareholders, and fees paid to the state for incorporation. The corporation
can elect to deduct up to $5,000 of these costs, and amortize (ratably deduct)
the remainder over 15 years.

● Sec. 263(a): Costs of a restructuring generally must be capitalized.

● PLR: The IRS rejected taxpayer’s argument that
certain investigation costs were Sec. 195 start-up costs eligible for
amortization under Rev. Rul. 99-23. The taxpayer evaluated divisive
reorganizations but Rev. Rul. 99-23 is limited to acquisitions of a new
business. Costs incurred to investigate and pursue non-mutually exclusive
business restructurings  (multiple
separate transactions) that were not consummated are deductible under Sec. 165
as a loss when each potential option is abandoned. These could include a
recapitalization, spin-off of a business division, or the divestiture of a
divisions. Costs incurred to investigate and pursue mutually exclusive transactions
must be capitalized as part of the costs of the completed transaction. PLR
200749013.