How do taxpayers deduct Formation Costs or Organization costs on the Tax Return?
According to the IRS, Formation Costs or Organization Costs are "incurred in the formation of an entity and include legal fees, filing fees, and related costs to form the Business Entity."
Furthermore, "only those expenses are included as part of Organization Costs that were incurred prior to the original due date of the tax return for the year in which the entity begins business operations."
These costs are not deductible as business expenses and generally required to be capitalized and amortized over a 15 year period.
The IRS has stated that for Partnerships and for Corporations, the amount that can be deducted for Organization costs for the tax year in which it begins business is an amount equal to the lesser of:
a. The amount of organization costs incurred, or
b. $5,000, reduced (but not below zero) by the amount by which the organization costs exceed $50,000.
4. Any organization expenses in excess of the deductible amount are allowed to be amortized ratably over 15 years (180 months) beginning with the month in which the entity.