For Tax Professionals  
T.D. 8797 December 16, 1998

Election to Amortize Start-Up Expenditures for
Active Trades or Businesses

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8797] RIN 1545-
AT71

TITLE: Election to Amortize Start-Up Expenditures for Active Trades
or Businesses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations concerning start-
up expenditures for active trades or businesses under section 195.
These regulations are necessary to provide rules and procedures for
electing to amortize start-up expenditures under section 195. They
affect all taxpayers wishing to amortize start-up expenditures under
section 195.

DATES: Effective Date: These regulations are effective December 17,
1998.

Applicability Date: For the date of applicability of these
regulations, see �1.195-1(d).

FOR FURTHER INFORMATION CONTACT: David Selig, (202) 622-3040 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act The collection of information contained in
these final regulations has been reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1582.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.

The estimated annual burden per respondent varies from .10 hours to
.50 hours, depending on individual circumstances, with an estimated
average of .25 hoU.S.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

Section 195 was added to the Internal Revenue Code of 1954 by
section 102 of the Miscellaneous Revenue Act of 1980, and was
amended by section 94 of the Tax Reform Act of 1984. Section 195
generally provides that no deduction is allowed for start-up
expenditures unless the taxpayer elects to amortize the
expenditures. Under section 195(b)(1), if the taxpayer elects to
amortize start-up expenditures, the expenditures are amortizable
over a period of not less than 60 months beginning with the month in
which the active trade or business begins.

Section 195(d) provides that an election to amortize start-up
expenditures must be made not later than the time prescribed by law
for filing the return for the taxable year in which the active trade
or business begins (including extensions thereof).

On January 13, 1998, the IRS published a notice of proposed
rulemaking [REG-209373-81] in the Federal Register (63 FR 1933)
proposing amendments to the Income Tax Regulations (26 CFR part 1)
concerning the election to amortize start-up expenditures under
section 195 of the Internal Revenue Code. A public hearing was
scheduled for June 2, 1998, pursuant to a notice of public hearing
published simultaneously with the notice of proposed rulemaking. No
one requested to speak at the public hearing, therefore, no public
hearing was held. Written comments responding to the notice were
received. After consideration of all of the comments, the proposed
regulations are adopted as revised by this Treasury decision.

Explanation of Revisions and Discussion of Comments

The proposed regulations provide that an election to amortize start-
up expenditures is made by attaching a statement to the taxpayer's
income tax return. The income tax return and statement must be filed
not later than the date prescribed by law for filing the income tax
return (including any extensions of time) for the taxable year in
which the active trade or business begins. Thus, a taxpayer may file
an election for any taxable year prior to the year in which the
taxpayer's active trade or business begins, and such election will
become effective in the month of the year in which the taxpayer's
active trade or business begins.

One commentator suggested that the provision in the proposed
regulations permitting the filing of a revised statement to include
any start-up expenditures not included in the taxpayer's original
election statement appears to endorse the practice of those
taxpayers who file elections listing token or zero start-up
expenditures on the election statement and subsequently attempt to
increase the amount subject to amortization by expenditures that
taxpayers have been unsuccessful in maintaining as expansion costs.
The provision is not designed to permit a taxpayer to revise the
election statement to include start-up expenditures omitted by
reason of the taxpayer's claim on the taxpayer's return that the
expenditures are expansion costs. Accordingly, the regulations have
been clarified to provide that the election statement may not be
revised to include expenditures that a taxpayer has treated on the
taxpayer's tax return in a manner inconsistent with their treatment
as start-up expenditures. Another commentator suggested that a
separate statement to make the election under section 195 should not
be required for small businesses, but rather a check-the-box
election should be provided. A separate statement is necessary to
ensure that the expenses listed therein are properly characterized
as start-up expenditures, and that amortization of the start-up
expenditures will begin and end at the proper times. The statement
is simple to complete and the time to prepare the statement is
minimal.

Accordingly, the final regulations retain the requirement that a
separate statement with the requisite information be attached to the
taxpayer's return.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations do not have a significant impact on a substantial
number of small entities. This certification is based upon the fact
that the time required to prepare and file the election statement is
minimal and will not have a significant impact on those small
entities that choose to make the election.

Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice
of proposed rulemaking preceding these regulations was submitted to
the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business. Drafting Information
The principal author of these regulations is David Selig, Office of
the Assistant Chief Counsel (Passthroughs and Special Industries),
IRS. However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements Adoption of
Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602
are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.195-1 is added to read as follows:

�1.195-1 Election to amortize start-up expenditures.

(a) In general. Under section 195(b), a taxpayer may elect to
amortize start-up expenditures (as defined in section 195(c)(1)). A
taxpayer who elects to amortize start-up expenditures must, at the
time of the election, select an amortization period of not less than
60 months, beginning with the month in which the active trade or
business begins. The election applies to all of the taxpayer's
start-up expenditures with respect to the trade or business. The
election to amortize start- up expenditures is irrevocable, and the
amortization period selected by the taxpayer in making the election
may not subsequently be changed.

(b) Time and manner of making election. The election to amortize
start-up expenditures under section 195 shall be made by attaching a
statement containing the information described in paragraph (c) of
this section to the taxpayer's return. The statement must be filed
no later than the date prescribed by law for filing the return
(including any extensions of time) for the taxable year in which the
active trade or business begins. The statement may be filed with a
return for any taxable year prior to the year in which the
taxpayer's active trade or business begins, but no later than the
date prescribed in the preceding sentence. Accordingly, an election
under section 195 filed for any taxable year prior to the year in
which the taxpayer's active trade or business begins (and pursuant
to which the taxpayer commenced amortizing start-up expenditures in
that prior year) will become effective in the month of the year in
which the taxpayer's active trade or business begins.

(c) Information required. The statement shall set forth a
description of the trade or business to which it relates with
sufficient detail so that expenses relating to the trade or business
can be identified properly for the taxable year in which the
statement is filed and for all future taxable years to which it
relates. The statement also shall include the number of months (not
less than 60) over which the expenditures are to be amortized, and
to the extent known at the time the statement is filed, a
description of each start-up expenditure incurred (whether or not
paid) and the month in which the active trade or business began (or
was acquired). A revised statement may be filed to include any
start-up expenditures not included in the taxpayer's original
election statement, but the revised statement may not include any
expenditures for which the taxpayer had previously taken a position
on a return inconsistent with their treatment as start-up
expenditures. The revised statement may be filed with a return filed
after the return that contained the election.

(d) Effective date. This section applies to elections filed on or
after December 17, 1998.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 4. In �602.101, paragraph (c) is amended by adding an entry to
the table in numerical order to read as follows:

�602.101 OMB Control numbers.

*****

(c) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.195-1.........................................1545-1582

* * * * *

Bob Wenzel
Deputy Commissioner of Internal Revenue
Approved:
Donald C. Lubick
Assistant Secretary of the Treasury


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