Answer:
Juliette Sporting Goods
Determination of the number of Start-up Costs to Expense Under U.S. GAAP and IRS Reporting:
1) She incurred start-up costs of $3,000.
Juliette can expense $3,000 this first year under US GAAP and for IRS tax purposes.
2) She incurred start-up costs of $42,250.
i) Under U.S. GAAP reporting, Juliette can expense the $42,250 this year.
ii) Under IRS reporting, Juliette can expense $5,000 this first year or elect to expense $2,250 the first year. The balance of $37,250 (or $40,000) will be amortized.
3) She incurred start-up costs of $51,850.
i) Under U.S. GAAP reporting, Juliette can expense the $51,850 this year.
ii) Under IRS reporting, Juliette can expense $1,850 this first year and the balance of $50,000 would be amortized.
Explanation:
a) For those companies reporting under US GAAP, Financial Accounting Standards Codification 720 states that start up/organization costs should be expensed as incurred.
b) Start-up cost is treated differently for tax purposes: The IRS allows a deduction of $5,000 in the first year you are in business, provided it is $50,000 or less. This deduction must be made in the first year of active engagement in the business. The balance over $5,000 must be capitalized and amortized over the applicable number of years.
If start-up cost is more than $50,000 but less than $55,000,there is a phase out of the $5,000 deduction. For example, if you spent $51,850, your deduction in the first year would be $1,850 and then the balance of $50,000 would have to be capitalized and amortized.
If startup costs is greater than $55,000, there is no immediate deduction of $5,000 in the first year of active business. All the costs would be capitalized and then amortized each year as an expense.
The summary is that for tax reporting, the IRS does not allow a start-up cost deduction in excess of $5,000 each year. And the limit for this amortization of start-up costs is 15 years or 180 months.
