Election to Amortize Start-Up Expenditures for Active Trade or Business

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8797]

RIN 1545-AT71

Election to Amortize Start-Up Expenditures for Active Trade or

Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning start-up

expenditures for active trade or business under section 195. These

regulations are necessary to provide rules and procedures for electing

to amortize start-up expenditures under section 195. They affect all

taxpayers wishing to amortize start-up expenditures under section 195.

DATES: Effective Date: These regulations are effective December 17,

1998.

Applicability Date: For the date of applicability of these

regulations, see Sec. 1.195-1(d).

FOR FURTHER INFORMATION CONTACT: David Selig, (202) 622-3040 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations

has been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)) under control number 1545-1582.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The estimated annual burden per respondent varies from .10 hours to

.50 hours, depending on individual circumstances, with an estimated

average of .25 hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the Treasury, Office of Information

and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

Section 195 was added to the Internal Revenue Code of 1954 by

section 102 of the Miscellaneous Revenue Act of 1980, and was amended

by section 94 of the Tax Reform Act of 1984.

Section 195 generally provides that no deduction is allowed for

start-up expenditures unless the taxpayer elects to amortize the

expenditures. Under section 195(b)(1), if the taxpayer elects to

amortize start-up expenditures, the expenditures are amortizable over a

period of not less than 60 months beginning with the month in which the

active trade or business begins. Section 195(d) provides that an

election to amortize start-up expenditures must be made not later than

the time prescribed by law for filing the return for the taxable year

in which the active trade or business begins (including extensions

thereof).

On January 13, 1998, the IRS published a notice of proposed

rulemaking [REG-209373-81] in the Federal Register (63 FR 1933)

proposing amendments to the Income Tax Regulations (26 CFR part 1)

concerning the election to amortize start-up expenditures under section

195 of the Internal Revenue Code. A public hearing was scheduled for

June 2, 1998, pursuant to a notice of public hearing published

simultaneously with the notice of proposed rulemaking. No one requested

to speak at the public hearing, therefore, no public hearing was held.

Written comments responding to the notice were received. After

consideration of all of the comments, the proposed regulations are

adopted as revised by this Treasury decision.

Explanation of Revisions and Discussion of Comments

The proposed regulations provide that an election to amortize

start-up expenditures is made by attaching a

[[Page 69555]]

statement to the taxpayer's income tax return. The income tax return

and statement must be filed not later than the date prescribed by law

for filing the income tax return (including any extensions of time) for

the taxable year in which the active trade or business begins. Thus, a

taxpayer may file an election for any taxable year prior to the year in

which the taxpayer's active trade or business begins, and such election

will become effective in the month of the year in which the taxpayer's

active trade or business begins.

One commentator suggested that the provision in the proposed

regulations permitting the filing of a revised statement to include any

start-up expenditures not included in the taxpayer's original election

statement appears to endorse the practice of those taxpayers who file

elections listing token or zero start-up expenditures on the election

statement and subsequently attempt to increase the amount subject to

amortization by expenditures that taxpayers have been unsuccessful in

maintaining as expansion costs. The provision is not designed to permit

a taxpayer to revise the election statement to include start-up

expenditures omitted by reason of the taxpayer's claim on the

taxpayer's return that the expenditures are expansion costs.

Accordingly, the regulations have been clarified to provide that the

election statement may not be revised to include expenditures that a

taxpayer has treated on the taxpayer's tax return in a manner

inconsistent with their treatment as start-up expenditures.

Another commentator suggested that a separate statement to make the

election under section 195 should not be required for small businesses,

but rather a check-the-box election should be provided. A separate

statement is necessary to ensure that the expenses listed therein are

properly characterized as start-up expenditures, and that amortization

of the start-up expenditures will begin and end at the proper times.

The statement is simple to complete and the time to prepare the

statement is minimal. Accordingly, the final regulations retain the

requirement that a separate statement with the requisite information be

attached to the taxpayer's return.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It is hereby certified that

these regulations do not have a significant impact on a substantial

number of small entities. This certification is based upon the fact

that the time required to prepare and file the election statement is

minimal and will not have a significant impact on those small entities

that choose to make the election. Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is

not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the

notice of proposed rulemaking preceding these regulations was submitted

to the Chief Counsel for Advocacy of the Small Business Administration

for comment on its impact on small business.

Drafting information. The principal author of these regulations is

David Selig, Office of the Assistant Chief Counsel (Passthroughs and

Special Industries), IRS. However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.195-1 is added to read as follows:

Sec. 1.195-1 Election to amortize start-up expenditures.

(a) In general. Under section 195(b), a taxpayer may elect to

amortize start-up expenditures (as defined in section 195(c)(1)). A

taxpayer who elects to amortize start-up expenditures must, at the time

of the election, select an amortization period of not less than 60

months, beginning with the month in which the active trade or business

begins. The election applies to all of the taxpayer's start-up

expenditures with respect to the trade or business. The election to

amortize start-up expenditures is irrevocable, and the amortization

period selected by the taxpayer in making the election may not

subsequently be changed.

(b) Time and manner of making election. The election to amortize

start-up expenditures under section 195 shall be made by attaching a

statement containing the information described in paragraph (c) of this

section to the taxpayer's return. The statement must be filed no later

than the date prescribed by law for filing the return (including any

extensions of time) for the taxable year in which the active trade or

business begins. The statement may be filed with a return for any

taxable year prior to the year in which the taxpayer's active trade or

business begins, but no later than the date prescribed in the preceding

sentence. Accordingly, an election under section 195 filed for any

taxable year prior to the year in which the taxpayer's active trade or

business begins (and pursuant to which the taxpayer commenced

amortizing start-up expenditures in that prior year) will become

effective in the month of the year in which the taxpayer's active trade

or business begins.

(c) Information required. The statement shall set forth a

description of the trade or business to which it relates with

sufficient detail so that expenses relating to the trade or business

can be identified properly for the taxable year in which the statement

is filed and for all future taxable years to which it relates. The

statement also shall include the number of months (not less than 60)

over which the expenditures are to be amortized, and to the extent

known at the time the statement is filed, a description of each start-

up expenditure incurred (whether or not paid) and the month in which

the active trade or business began (or was acquired). A revised

statement may be filed to include any start-up expenditures not

included in the taxpayer's original election statement, but the revised

statement may not include any expenditures for which the taxpayer had

previously taken a position on a return inconsistent with their

treatment as start-up expenditures. The revised statement may be filed

with a return filed after the return that contained the election.

(d) Effective date. This section applies to elections filed on or

after December 17, 1998.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 4. In Sec. 602.101, paragraph (c) is amended by adding an

entry to the table in numerical order to read as follows:

[[Page 69556]]

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

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Current OMB

CFR part or section where identified and described control No.

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* * * * *

1.195-1.................................................... 1545-1582.

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Bob Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: November 30, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98-33124 Filed 12-16-98; 8:45 am]

BILLING CODE 4830-01-U