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start-up and organizational costs over an amor- tization period of 60 months or more. See How To Make the Election, later. The cost must qualify as one of the follow- ing. • A business start-up cost. • An organizational cost for a corporation. • An organizational cost for a partnership. Business Start-Up Costs Start-up costs are amounts paid or incurred for (a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and for the production of income in anticipation of the activ- ity becoming an active trade or business. Qualifying costs. A start-up cost is amortiza- ble if it meets both of the following tests. • It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). • It is a cost you pay or incur before the day your active trade or business begins. Start-up costs include amounts paid for the following. • An analysis or survey of potential markets, products, labor supply, transportation fa- cilities, etc. • Advertisements for the opening of the busi- ness. • Salaries and wages for employees who are being trained and their instructors. • Travel and other necessary costs for se- curing prospective distributors, suppliers, or customers. • Salaries and fees for executives and con- sultants, or for similar professional serv- ices. Nonqualifying costs. Start-up costs Don't in- clude deductible interest, taxes, or research and experimental costs. See Research and Ex- perimental Costs, later. Purchasing an active trade or business. Amortizable start-up costs for purchasing an ac- tive trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. These are costs that help you decide whether to purchase a business. Costs you incur in an attempt to purchase a specific business are capital expenses that you can't amortize. Example. On June 1, you hired an account- ing firm and a law firm to assist you in the po- tential purchase of XYZ, Inc. They researched XYZ's industry and analyzed the financial pro- jections of XYZ, Inc. In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. The letter stated that a binding com- mitment would result only after a purchase agreement was signed. The law firm and ac- counting firm continued to provide services in- cluding a review of XYZ's books and records and the preparation of a purchase agreement. On October 22, you signed a purchase agree- ment with XYZ, Inc. All amounts paid or incurred to investigate the business before October 22 are amortizable investigative costs. Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Disposition of business. If you completely dispose of your business before the end of the amortization period, you can deduct any re- maining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a busi- ness. Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Qualifying costs. To qualify as an organiza- tional cost, it must be: • For the creation of the corporation, • Chargeable to a capital account (see chap- ter 1), • Amortized over the life of the corporation if the corporation had a fixed life, and • Incurred before the end of the first tax year in which the corporation is in business. A corporation using the cash method of ac- counting can amortize organizational costs in- curred within the first tax year, even if it doesn't pay them in that year. Examples of organizational costs include the following. • The cost of temporary directors. • The cost of organizational meetings. • State incorporation fees. • The cost of legal services. Nonqualifying costs. The following items are capital expenses that can't be amortized. • Costs for issuing and selling stock or se- curities, such as commissions, professio- nal fees, and printing costs. • Costs associated with the transfer of as- sets to the corporation. Costs of Organizing a Partnership The costs to organize a partnership are the di- rect costs of creating the partnership. Qualifying costs. A partnership can amortize an organizational cost only if it meets all the fol- lowing tests. • It is for the creation of the partnership and not for starting or operating the partnership trade or business. • It is chargeable to a capital account (see chapter 1). • It could be amortized over the life of the partnership if the partnership had a fixed life. • It is incurred by the due date of the partner- ship return (excluding extensions) for the first tax year in which the partnership is in business. However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. • It is for a type of item normally expected to benefit the partnership throughout its entire life. Organizational costs include the following fees. • Legal fees for services incident to the or- ganization of the partnership, such as ne- gotiation and preparation of the partner- ship agreement. • Accounting fees for services incident to the organization of the partnership. • Filing fees. Nonqualifying costs. The following costs can't be amortized. • The cost of acquiring assets for the part- nership or transferring assets to the part- nership. • The cost of admitting or removing partners, other than at the time the partnership is first organized. • The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. • The costs for issuing and marketing inter- ests in the partnership such as brokerage, registration, and legal fees and printing costs. These “syndication fees” are capital expenses that can't be depreciated or amortized. Liquidation of partnership. If a partnership is liquidated before the end of the amortization pe- riod, the unamortized amount of qualifying or- ganizational costs can be deducted in the part- nership's final tax year. However, these costs can be deducted only to the extent they qualify as a loss from a business. How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier under Business Start-Up Costs). You can choose an amortiza- tion period for start-up costs that is different from the period you choose for organizational costs, as long as both aren't less than the appli- cable amortization period. Once you choose an amortization period, you can't change it. To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month. Cash method partnership. A partnership us- ing the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. However, any cost the partnership could have deducted as an organi- zational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. You also may be required to attach Chapter 8 Amortization Page 29