Start Up Costs and Organizational Costs Explained
Definitions, Meaning, and Examples
Business Encyclopedia, ISBN 978-1-929500-10-9. Revised 2014-09-18.
Start up costs for a new business can some-
times be amortized across several years. However, tax laws on start up costs differ substantially from country to country.
Start up costs are the costs associated solely with the implementation of a plan, project, or business. Start up cost typically represents the cost incurred prior to the realization of benefits from the plan, project or business. Under certain conditions, and in some countries, start up costs can be amoritzed aross several years.
In business, organizational costs are the costs specifically of organizing a corporation (e.g., the cost of legal services or the cost of organizational meetings).
Plan or project start up costs
It is important to estimate the full extent of project or plan start up costs before starting because these costs may be substantial. They may seriously impact business case analysis and financial metrics that play a role in deciding whether or not to implement the plan or project. These costs may impact a proposed project's estimated return on investment (ROI) or total cost of ownership (TCO), for instance.
For planning and decision making purposes, project or plan start up costs may include capital costs (e.g., for acquisition of assets acquired for the project or plan) and operating expenses. These may be called start up costs if:
- Costs are incurred before income or other benefits from the project or plan are realized, and
- These costs are incurred only if the project or plan is implemented.
A wide range of cost categories may meet these criteria, including such things as costs for
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Business start up and organizational costs
When a new business is started In the United States, eligible start up costs and organizational costs can be treated as capital costs which can be amortized across a specified time period (see the links to tax information in the following section for more information on US rules and specifics for other countries).
A start up cost can be amortized if
- It is a cost that could be deducted if paid or incurred to operate an existing active trade or business, and
- It is a cost incurred before active trade or business begins
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Those costs are generally eligible start up costs for a new business. When purchasing an existing business, already in operation, start up costs eligible for amortization are limited to the costs or investigating or searching for existing business.
Start up costs in either case (new business or purchase of existing business) do not include taxes and interest that are otherwise deductible and, usually, do not include research and development costs.
costs of organizing a corporation (organizational costs) may also
qualify for amortization capital costs if the costs are incurred
specifically for the purpose of creating the corporation. Such costs
typically include such things as the costs of legal services,
incorporation fees, the use of temporary directors, and the cost of
Tax treatment of start up and organizational costs
Tax treatment of startup and organizational costs varies from country to country. Links to guidelines from six countries taxing authorities appear in the list below.
- For Canada, the Canada Revenue Agency describes the classification and tax treatment of Business Start Up Costs in Income Tax Interpretation Bulletin IT-364, Commencement of Business Operations, available online at http://www.cra-arc.gc.ca/E/pub/tp/it364/it364-e.html .
- For tax treatment of start up costs in the Republic of Ireland, see Inland Revenue Publication IT48, Starting in Business-A Revenue Guide. A PDF version of Publication IT48 is available by clicking here.
- For New Zealand, some information on tax handling of pre-production activities, including research and development, is available on the NZ Inland Revenue web page "Research and development (R&D) tax credit," available at http://www.ird.govt.nz/rd-tax-credit/eligibility/excluded-activities/pre-production.
- For the United Kingdom, HM Revenue and Customs has available several publications on tax considerations from the web page "Starting a Business," accessible at http://www.hmrc.gov.uk/ct/getting-started/new-company/start-up.htm
- The United States Government tax rules for declaring and amortizing start up and organizational costs are described in US Internal Revenue Service Publication 535, Business Expenses. A PDF version of Publication 535 is available by clicking here.
By Marty Schmidt. Copyright © 2004-.