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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I am trying to determine how to should handle the 2010 1120S

Resolved Question:

I am trying to determine how to should handle the 2010 1120S Corp Tax Return with the following issue:

A 2009 1120S return was filed listing $5000 in start up/organizational costs and amortizaton commensed on start up costs over $5000.

There is a question as to whether the the "active trade or business" had actually begun in 2009 because no revenue was earned?

If one had to correct the 2009 return, what is the proper way to correct it if the business operations did not truly start until a subsequent year? Do all costs incurred in 2009 have to be totaled and added to 2010 costs and then amortized over 180 months?
Can one undo a prior year return without IRS approval?

Thanks for your response.
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

Did you do K-1s last year for 2009? What was the total amount of start-up cost amortization for 2009?

Customer:

Stephen,

Customer:

A single K-1 was issued last year for approximately ($7,000), the total loss of the S corp. Total amortization taken was $147, they were tagged "organizational costs" on the Form 4562 election. Total to be amortized $22,500.

Customer:

Another $1900 in office expenses was also deducted on return.

Customer:

Company also did NOT have income in 2010; but many development expenses, expected to have revenue for first time in 2011.

Customer:

Thanks for your help...

Customer:

P.S.

Customer:

Is this then a "0" return for 2010?

Stephen E. Grizey :

NO. The start of business operations doesn't require revenue. Many companies have business activity before revenue is realized. I wouldn't consider amending the 2009 for $147. of amortization of startup costs; from your answer it appears something was going on to generate a $7,000. loss. The same would hold for 2010. You would prepare the 2010 return, just as you did for 2009.

Customer:

Steve,

Customer:

Steven,

Customer:

Just wanted to clarify a few items and see if your response is still the same...

Customer:

The 2009 loss ($7000) consisted of:

Customer:

$5000...........allowed start up expense provision

Customer:

$147..............amortization of remain start up costs

Customer:

1900..........Office expenses taken after business started

Customer:

Company was started in 2009 to develop a product and utimately sell via the internet and TV programs. At the end of 2010 product was not yet ready to sell, therefore there were no sales. The efforts since 2009 were to develop the product and lay the ground work to sell same when it became available for sale.

Customer:

What is confusing to me is the definition of when a "business begins" as stated in the Form 1120S instructions (page 14) referral to IRS Temporary Regulation 1.248-1T (page 562) which states:

Customer:

Ordinarily, a corporation begins business when it starts the business operations for which it was organized.

Customer:

Futher in the same reference is the following sentence,,,If the activities of the corporation have advanced to the extent necessary to establish the nature of the business operations, however, it will be deemed to have begun business.

Customer:

If the compnay's goal is to manufacture and sell products, but those products are not yet manufactured and ready for sale, has the company "begun business yet?"

Customer:

In the 1065 Deskbook definition of an RIA publication a notation (Start-up period Defined) there is a notation that states : Generally, the start-up period ends when the taxpayer is in a position to begin earning revenue from the trade or business.

Customer:

Appears to me that your in the start-up phase until you in the position to earn revenue and have a product to sell?

Customer:

Your thoughts are greatly appreciated.

Customer:

Thanks

Stephen E. Grizey :

What would you say about a 1 product drug company that takes 10 years of R & D & clinical trials & then the FDA doesn't approve the drug for marketing for human consumption? If that was a 10 years start-up exercise there would never be any operations; how about a marketing company that spends five years developing a marketing network & then can't find anyone to sell it to anyone, for any number of reasons; have they been in the start-up phase for 5 years? What happens to all those costs; they're out of business now; when do they get to write them off or is the answer never? What about an author who takes 10 years to write the Great American Novel & dies with the book unfinished; what happens to all his costs? I could go on all day with examples; what's the problem? Did you write off expenses you couldn't use? You could argue these points back & forth all day; pretty much justify any treatment you want;

Customer:

Stephen,

Customer:

I understand the examples you are illustrating. The taxpayer in my case did not need the losses and my issue is not if they could or could not use the losses. What I'm really trying to understand is at what point in a development and sales company does the orgainzational and start up costscease and the amortization can start. In my particular case the S corp was organized in late 2009 and engaged a company to develop a product incurring organizational costs, start up costs and various travel and office costs in connection therewith. Does the engaging of a development company in 2009 stop the start up phase and put costs into an R & D category which allows for write off of costs?

Customer:

Once I have a clear definition of when the start up phase stops I can move forward. The 2009 return filed recognized the end of the start up costs at the time the business was incorporated which I questioned was a proper treatment.

Customer:

Thanks again for your reply.

Stephen E. Grizey :

The problem you have is you're trying to apply an objective standard to a subjective determination which is what I was trying to illustrate with my examples; further the election to amortize the start-up or organization costs is irrevocable, so I'm not sure it matters at this point.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4020
Experience: Extensive Experience with Tax, Financial & Estate Issues
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