Startup costs: Book vs. tax treatment
New businesses, which are vital to a healthy economy, usually incur costs before they begin active conduct of their intended business operations. These costs are frequently generically referred to as startup costs of a business.
For financial accounting purposes, these costs are generally included in the category of startup costs and are all treated the same way. However, for tax purposes, costs that are financial accounting startup costs may be required to be further subdivided into smaller more specific categories, each of which is treated differently.
For book purposes, startup costs are costs a business incurs in its activities in preparing to begin its active conduct. Under ASC Section 720-15-20, startup activities include: Opening a new facility; Introducing a new product or service; Conducting business in a new territory; Conducting business with an entirely new class of customers … or beneficiary; Initiating a new process in an existing facility; Commencing some new operation. Financial accounting standards also treat the costs of organizing a corporation or partnership as startup costs rather than as separate costs.
The treatment of preoperational startup costs is potentially much more complex for tax purposes than financial accounting purposes. Costs that are startup costs for financial accounting purposes must be analyzed and possibly subdivided into smaller categories, each of which is treated differently for tax purposes. Making things more confusing, one of these smaller categories for tax purposes includes the costs described in Sec. 195, which commonly are referred to as startup costs in tax discussions.
Please contact your CPA for advise.