Quasi Sec. 195 regulations.

• Author: Perkins, Michael F.

Taxpayers are not permitted to currently deduct business start-up costs. However, they may elect under Sec. 195 to amortize these costs over 60 months--beginning with the month in which an active business begins. Because of the lack of regulations, many taxpayers ignore Sec. 195 and continue to deduct start-up costs without making the Sec. 195 election. IRS Letter Ruling 9047032 emphasized that start-up costs are not deductible and can be amortized only with an election for the appropriate tax year.

In enacting Sec. 195, the Miscellaneous Revenue Act of 1980 granted taxpayers the ability to amortize start-up costs; these are not deductible under Sec. 162 since, by definition, they are incurred before a business starts. According to Sec. 195(c)(2)(A), the determination of when an active business begins is to be made in accordance with regulations. However, these regulations have yet to be even proposed.

The House Ways and Means Committee Report on the original version of Sec. 195 stated that "the definition of when a business begins is to be made in reference to the existing provisions for the amortization of organizational expenditures (Code secs. 248 and 709)."

The regulations under Secs. 248 and 709 use a facts and circumstances test in determining when business begins. If the underlying corporate or partnership activities have advanced to the extent necessary to establish the nature of the business operations, the entity will be deemed to have begun business (Regs. Secs. 1.248-1(a)(3) and 1.709-2(c)).

In the early 1980s, Congress perceived three court cases as limiting the scope of Sec. 195. In Blitzer, 684 F2d 874 (Ct. Cl. 1982), the then Court of Claims intimated that newly organized business entities could currently deduct, under Sec. 162(a), amortization of organization and loan costs, telephone and utility bills, rent, stationery, and salaries and wages--regardless of whether the entity had completed construction of its income-producing assets.

In Hoopengarner, 80 TC 538 (1983), the Tax Court held that rent paid under a leasehold interest in land on which the taxpayer was to construct an office building was not deductible under Sec. 162 before the building was completed, since the taxpayer was not carrying on a business when the payments were made. However, the court further held that a portion of the payments was deductible under Sec. 212--since they were ordinary and necessary expenses paid or incurred for the management...