Section 195 of the Internal Revenue Code encompasses the provisions concerning amortization of the start-up expenditures and is applicable to any trade or business. Start-up expenditures include all the money spent on creation of a trade or business or investigation of the creation or acquisition of an active trade or business, as well as on any activity that is supposed to bring profit before the beginning of active trade or business (Internal Revenue Code). Start-up costs can be amortized if they meet the following criteria: they incurred for operation of the existing active trade or business in the same field as the one entered into; and they incur before the day of beginning an active trade or business ("Publication 535 (2015), Business Expenses.").
Start-up expenses should be distinguished from organizational expenses. While start-up expenditures include the costs of creating an active trade or industry or investigating its creation or acquisition, organizational expenditures are the costs spent on the creation of a business entity that incurred within the first tax year of company’s being in business (for corporations) or before the due date of the return (for a partnership or LLC). Both of them are generally capital expenditures ("Publication 535 (2015), Business Expenses."). Deduction and amortization of organizational costs is carried out similarly to start-up costs.
A defined amount of start-up costs can be deducted, while the remaining sum can be amortized ratably within a 15 year period, starting with the month an active trade or business begins operating. Start-up costs are amortized in Part V of Schedule C ("Other Expenses"). In order to file an election to amortize start-up costs, it is necessary to fill in and enclose form 4562 to the return for the first tax year of being in business ("Elections Regarding Start-up Expenditures, Corporation Organizational Expenditures, and Partnership Organizational Expenses").
In the matter of deducting start-up expenditures, it is important to determine the day at which a business begins. In accordance with the IRS definition, a company begins its business when it starts conducting business operations that constitute the purpose of its organization ("Internal Revenue Bulletin - T.D. 9411.").
The IRS also distinguishes between the terms “begins business” and “comes into existence”. It states that a business comes into existence on the date of its registration. It is not sufficient to consider mere organizational activities, for instance the act of receiving a a corporate charter or certification of formation, to mark the beginning of a business ("Internal Revenue Bulletin - T.D. 9411.").
A business is considered to have begun operating only when the activities of a company are advanced in the measure that allows to establish the nature of a company’s business operations.
It also shall be noted that the issue of determining the date on which business begins should be contemplated for each particular case, taking into account the circumstances attributable to it ("Internal Revenue Bulletin - T.D. 9411.").
As for the problem, stated in the task, the business begins when the individual purchases equipment, necessary for manufacturing furniture, since, according to the IRS this act constitutes the purchase of operating assets that are necessary for the given business and this condition shall suffice to consider this date the benchmark of beginning the business.
Works cited
"Elections Regarding Start-up Expenditures, Corporation Organizational Expenditures, and Partnership Organizational Expenses", 26 CFR Part 1 § 1.195–1T, 2008
"Internal Revenue Bulletin - T.D. 9411." Irs.gov, 2008. Web. 19 May 2016.
Internal Revenue Code, § 195. Print.
"Publication 535 (2015), Business Expenses." Irs.gov, 2015. Web. 19 May 2016.
