Reconciling Book/Tax Treatment of Startup Costs: Deferred Tax Assets and Liabilities, Schedules M-1 and M-3, Partnership Provisions

An often significant challenge for tax advisers is properly calculating and reporting the differences in treatment of business organization costs between financial accounting standards and tax requirements. For book purposes, startup costs (also referred to as pre-operating costs or organization costs) are treated in a straightforward manner and are deducted as incurred. For tax purposes, however, these costs must be broken out into separate subcategories, many of which incur different tax treatment than straight expense deductions.

There are several provisions in the Code that specify how certain expenditures classed as startup costs must be treated for tax purposes. The basic framework for reporting “start-up expenditures” is found in Section 195, which defines startup costs as any amounts incurred to either investigate the potential of creating or acquiring an active trade or business, or in actually creating an active trade or business.

Section 195 also provides the option to elect and amortize startup costs, and sets the limits for those deductions. Additionally Section 197 offers guidance on how to treat intangibles related to business startups. The disparate book/tax treatment of startup costs requires tax advisers to maintain separate schedules to report on Schedule M-1 or Schedule M-3 of the Form 1120 tax return.

There are also differences in the Code for handling partnership startup expenses, with IRC 709 setting rules for dealing with partnership syndication costs as a component of start-up expenditures. Partnership advisers need to especially understand the differences in deductibility of unamortized costs in a partnership termination before the amortization period expires.

Listen as our experienced panel provides a comprehensive look on reconciling the book/tax treatment of startup costs.

1. General financial accounting treatment of organization and startup costs
2. Sources of tax rules requiring differences in book/tax treatment
   1. IRC Section 195
   2. IRC Section 197 intangibles
3. Amortization elections
4. Reporting startup cost book/tax differences on Schedules M-1 or M-3
5. Partnership reporting of book/tax differences including syndication costs
6. Disposition of business before end of amortization period
7. Effect of tangible personal property regulations on certain startup costs

The panel will discuss these and other important questions:

• How to treat Section 197 intangibles as startup costs
• How to treat gain/loss on disposition of business prior to the end of amortization period of organizational costs
• Reporting book/tax differences for startup costs incurred by a partnership
• Special rules for treatment of partnership syndication costs

Learning Objectives

After completing this course, you will be able to:

• Identify the tax law provisions and specific costs requiring divergent reporting for tax purposes
• Differentiate book/tax treatment of deferred tax assets and liabilities in startup costs
• Pinpoint IRS rules on difference in treatment of unamortized startup costs in various partnership termination scenarios
• Select from available elections on expensing, capitalization and amortization to achieve optimal tax results for clients

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Basic knowledge of taxation.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).