Corporations are artificial beings created by acts of incorporators who come together to form the corporate entity. The incorporation process typically results in the incurrence of costs, commonly called organizational expenditures, which are incidental to the creation of the corporation and necessary for its formation and organization.
Organizational expenditures bring the corporation into existence. They attach to the entity itself and, accordingly, are capital in nature. The benefit they provide--the corporate existence itself--extends to the full life cycle of the corporation. As a result, corporate organizational expenditures must initially be recorded for federal income tax purposes as an asset. Because most corporations have an unlimited life, general principles of tax law mandate that organizational expenditure costs remain on the balance sheet as an asset without opportunity for write-off. Section 248 of the Internal Revenue Code provides an exception, however, permitting a corporation to elect to amortize its qualifying organizational costs.
This article will examine the Section 248 organizational expenditure election. It will focus on the proper classification of organizational expenditures and the mechanics of the Section 248 amortization election and will point out a number of errors and misconceptions regarding the election.
IRC 248(a)--Amortization of Organizational Expenditures
Prior to the enactment of Section 248, General Accounting and Tax Principles governed the federal income tax treatment of organizational expenditures. The Board of Tax Appeals addressed the issue on several occasions, consistently ruling that organizational costs were capital in nature and not to be deducted currently, unless the corporation had a definite and fixed period of existence over which the costs could be allocated.
Effective for expenditures paid or incurred on or after August 16, 1954, Congress enacted Internal Revenue Code Section 248 to sanction the amortization of qualifying organizational expenditures. Specifically, Section 248(a) permits an amortization election by granting a corporation the power to elect to treat its organizational expenditures as deferred expenses to be allowed as a deduction ratably over a period to be selected by the corporation, but not less than sixty months, with the amortization period beginning with the month in which the corporation begins doing business.
What appears to be a simple and straightforward election is often the subject of misunderstanding and error. The law is dear, yet taxpayers routinely misinterpret and misapply the provisions of Section 248.
Section 248 does not change the basic nature of organizational expenditures. They remain capital in classification and initially must be recorded for federal income tax purposes as an asset. No amortization or other write-off is allowed unless the corporation has a clearly limited life or makes a Section 248 election. Absent a Section 248(a) election, the corporation generally must wait until its dissolution to deduct organizational expenditure costs.
Once made, a Section 248(a) amortization election is irrevocable. Treasury Reg. l.248-1(a)(l) specifically states that the period selected by the corporation upon making the election cannot be subsequently changed; that it must be adhered to in computing taxable income for the year of the election and for all subsequent taxable years.
Not all expenditures attendant to corporate formation qualify for the amortization election....