S Corp: Startup Costs and Depreciation


L

law2255

The IRS says that "Start-up costs include costs for the
following items: Travel and other necessary costs for
securing prospective distributors, suppliers, or customers."
I would like to know if the purchase and use of computer
equipment can be classified as such costs rather than as a
depreciation. I do know about the section 179 expense
election but I was curious about the flexibility of the
"Start-up costs."

Also, if you have equipment that you purchased and it is
depreciated for a term of 10 years, what happens when you
decide to close the business in year 3. Can the
depreciation costs from years 4-6 be deducted from taxes in
the following years?

Thanks.
 
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P

Paul Thomas, CPA

The IRS says that "Start-up costs include costs for the
following items: Travel and other necessary costs for
securing prospective distributors, suppliers, or customers."
I would like to know if the purchase and use of computer
equipment can be classified as such costs rather than as a
depreciation. I do know about the section 179 expense
election but I was curious about the flexibility of the
"Start-up costs."
Computers are equipment that must be depreciated. They are
not "start-up" costs by any stretch.
Also, if you have equipment that you purchased and it is
depreciated for a term of 10 years, what happens when you
decide to close the business in year 3. Can the
depreciation costs from years 4-6 be deducted from taxes in
the following years?
The treatment of equipment and other assets of a business as
it disolves is determined by what kind of business it is,
and what happens to those assets.

Generally, depreciation just ends. The basis of that asset
held by the business becomes the holding basis by say, the
owner who kept the computer, desk, car, etc. If or when
sold, there may be a gain or loss on disposition.

If however, the business ends and you trash it (as in toss
it in the dumpster), you can claim a loss on the disposition
of the asset that you physically no longer have and received
nothing for.
 
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J

JMc

The IRS says that "Start-up costs include costs for the
following items: Travel and other necessary costs for
securing prospective distributors, suppliers, or customers."
I would like to know if the purchase and use of computer
equipment can be classified as such costs rather than as a
depreciation. I do know about the section 179 expense
election but I was curious about the flexibility of the
"Start-up costs."

Also, if you have equipment that you purchased and it is
depreciated for a term of 10 years, what happens when you
decide to close the business in year 3. Can the
depreciation costs from years 4-6 be deducted from taxes in
the following years?
1) Fixed assets (i.e. your computer equipment) are not start
up costs. You depreciate (or make a Section 179 expense
election) your fixed assets.

2) Depends on what type of business (incorporated, sole
prop, partnership), and what is done with the equipment
(distributed to owner, abandoned, sold, etc).

a) If the asset is abandoned you take a loss on your books
equivalent to the net book value of your asset (i.e. book
cost less accumulated depreciation).

b) If the asset is distributed from a corporation, the
corporation would show the "sale" of the asset at fair
market value. The gain or loss would be computed by taking
the fair market value less the net book value. The
recipient of the asset would have a basis in the asset equal
to fair market value and a dividend (if C corp) equal to
fair market value of the asset.

c) If the asset is distributed from a partnership, the
recipient would receive the asset and have a basis equal to
the net book value of the asset when it was in the
partnership.
 
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