In an recent Business Week article, small business owners were reminded of a change in the Internal Revenue Code, effective in 2004, which allows companies to deduct $5,000 of their startup costs. Any expenses above that amount must be amortized, or depreciated, over the next 15 years.
The Section 195 deduction and the intent of Congress was that it be used by small businesses, not larger companies. Therefore, companies start losing the $5,000 deduction when their startup costs go over $50,000. They must then reduce the deduction by the amount that exceeds the $50,000 threshold. (Note: even if you can’t take advantage of the deduction, you can still amortize your costs over 15 years.)
If using the Section 195 deduction, be sure to carefully review and deduct only those expenses associated with startup costs. Some expenditures may need to be claimed under other deductions. For example, equipment must be claimed under Section 179. Research and development costs would fall under Section 174 of the tax code.