Business accounting question

[Young Drachma]

So, if you're a startup and say you spent the first 5 or 6 months before incorporation spending money on various corporate this and that, is it possible to retroactively account for all that in your balance sheet or whatever for the following year?

I'm not referring to revenues, as there are none. Just spending.

[Franklinnoble]

Why do I have the feeling this sort of thing is what got Bernie Ebbers in trouble?

[Young Drachma]

I believe he fudged his numbers. Besides, we didn't exist as a corporate entity and we do now. It's different, I think.

[digamma]

From a tax perspective, I believe you have the option to capitalize the costs initially in the first year or to amortize them and deduct over a five year period. They may also affect the basis of individual contributors in their shares or membership units. Of course, neither of these may answer your balance sheet questions. Bottom line, you should talk to an accountant.

[Young Drachma]

Originally Posted by digamma

From a tax perspective, I believe you have the option to capitalize the costs initially in the first year or to amortize them and deduct over a five year period. They may also affect the basis of individual contributors in their shares or membership units. Of course, neither of these may answer your balance sheet questions. Bottom line, you should talk to an accountant.

I'm waiting to talk to him right now. Cool, thanks.

[Galaxy]

Farrah should answer your questions pretty well when she logs on.

[Farrah Whitworth-Rahn]

Originally Posted by digamma

From a tax perspective, I believe you have the option to capitalize the costs initially in the first year or to amortize them and deduct over a five year period. They may also affect the basis of individual contributors in their shares or membership units. Of course, neither of these may answer your balance sheet questions. Bottom line, you should talk to an accountant.

Echoing digamma - talk to your accountant regarding your specific situation.

And in general he's right about capitalization and amortization over sixty months - under the old law. The tax law changed on October 22, 2004. Here's a thumbnail of the general tax law as it is now:

There are two types of expenses incurred before business begins. When business begins is key - it does not necessarily mean when the business legal entity is formed. For example if the business was operating as a sole proprietorship for two years, and then decided to form a corporation, business actually began two years ago. That would limit deductions available to you.

The two types of expenses are start up costs - costs incurred getting the business started, and organizational expenses - costs incurred to form the legal business entity.

The first $5,000 of start up costs incurred before business begins can be deducted, while the rest must be amortized over 180 months beginning in the month business begins. To the extent start up costs for the entire year exceed $55,000, the deduction is eliminated and all must be amortized. This treatment is an election, so a statement electing to deduct start up costs under Code Sec. 195 must be attached to the tax return in the year business begins.

The treatment for organizational costs is the same. So essentially you get a combined maximum deduction of $10,000 plus whatever amortization for the remaining expenses. The deduction for organizational costs is also an election, but the statement attached to the return will address different code sections depending on the type of business entity selected. It's Code Sec. 248 for Corporations and Sec. 709 for Partnerships.

The GAAP accounting treatment is way different from this - I can go into that if you want, but I would hate to send you on boring accounting information overload.

[Farrah Whitworth-Rahn]

Dola - if you don't make these elections you're screwed. You can't deduct any of these expenses until the business liquidates. So don't forget to make them!

[Draft Dodger]

anyone else dig it when Farrah talks like that?

[Young Drachma]

Originally Posted by Farrah Whitworth-Rahn

Echoing digamma - talk to your accountant regarding your specific situation.

And in general he's right about capitalization and amortization over sixty months - under the old law. The tax law changed on October 22, 2004. Here's a thumbnail of the general tax law as it is now:

There are two types of expenses incurred before business begins. When business begins is key - it does not necessarily mean when the business legal entity is formed. For example if the business was operating as a sole proprietorship for two years, and then decided to form a corporation, business actually began two years ago. That would limit deductions available to you.

The two types of expenses are start up costs - costs incurred getting the business started, and organizational expenses - costs incurred to form the legal business entity.

The first $5,000 of start up costs incurred before business begins can be deducted, while the rest must be amortized over 180 months beginning in the month business begins. To the extent start up costs for the entire year exceed $55,000, the deduction is eliminated and all must be amortized. This treatment is an election, so a statement electing to deduct start up costs under Code Sec. 195 must be attached to the tax return in the year business begins.

The treatment for organizational costs is the same. So essentially you get a combined maximum deduction of $10,000 plus whatever amortization for the remaining expenses. The deduction for organizational costs is also an election, but the statement attached to the return will address different code sections depending on the type of business entity selected. It's Code Sec. 248 for Corporations and Sec. 709 for Partnerships.

The GAAP accounting treatment is way different from this - I can go into that if you want, but I would hate to send you on boring accounting information overload.

Thanks Farrah

[digamma]

Originally Posted by Farrah Whitworth-Rahn

And in general he's right about capitalization and amortization over sixty months - under the old law. The tax law changed on October 22, 2004.

Doh!

[bryce]

CPA here. Farrah covered the tax angle. From the GAAP side, no, you cannot set up an asset and amortize over time; You have to expense as incurred (per SOP 98-5).

HOWEVER, as with most things accounting, there are exceptions that auditors will sign off on it it makes sense, and most importantly, if it is immaterial in amount. (Hedge funds are a good example if it's an immaterial amount in relation to the fund, since investors come in and out over time, so it's unfair to penalize all of the investors at the beginning if all costs were expensed up front.)

[Young Drachma]

So, here's another question.

We're still waiting to get our incorporation paperwork and all that back. So, consequently we have our money it's not in a corporate account. So...do we just have to wait and not spend a dime anymore until it all gets taken care of? Or better stated, when we spend money now, does that just convert to our books as an LLC?

It's late...that's why i'm asking.

danke

[Farrah Whitworth-Rahn]

Originally Posted by Dark Cloud

So, here's another question.

We're still waiting to get our incorporation paperwork and all that back. So, consequently we have our money it's not in a corporate account. So...do we just have to wait and not spend a dime anymore until it all gets taken care of? Or better stated, when we spend money now, does that just convert to our books as an LLC?

It's late...that's why i'm asking.

danke

Let me make sure I understand what you're asking -

You have company money sitting in someone's personal account and are ready to get started, except the legal entity has yet to be set up. Is that correct?

[Young Drachma]

Originally Posted by Farrah Whitworth-Rahn

Let me make sure I understand what you're asking -

You have company money sitting in someone's personal account and are ready to get started, except the legal entity has yet to be set up. Is that correct?

correct

[Farrah Whitworth-Rahn]

Ok this isn't that big of a deal.

You can't set up a company bank account until the legal entity is set up. Once the legal entity is set up you'll need to apply for a tax ID number from the IRS for the company. You can do this online at www.irs.gov by completing an SS-4. It takes no time at all. Once done, you'll have all the information necessary to set up the account. (But I'm sure you already knew that, that's why its sitting in a personal account. )

But that doesn't mean you can't start spending the money on corporate expenses now. Just keep very good records of what is spent, complete with receipts and purchase orders (if you plan to use those). This is very important because the cash is sitting in a personal account, you'll want rock solid support for every transaction in the event the IRS wants to question the expense.

Once the company is legal and has its bank account you'll make one rather large journal entry to record the pre-formation expenses.

[Young Drachma]

Awesome That saves me a phone call (and a fee)

We have an EIN and all that. So, that's good.

Thanks..you rock.

[Farrah Whitworth-Rahn]

Originally Posted by Dark Cloud

Awesome That saves me a phone call (and a fee)

Thanks..you rock.

Next time I'm going to charge ya. Kidding - good luck with the new business!

[Young Drachma]

Originally Posted by Farrah Whitworth-Rahn

Next time I'm going to charge ya. Kidding - good luck with the new business!

What games are you all putting out? Maybe I'll just buy a bunch...

[Farrah Whitworth-Rahn]

Originally Posted by Dark Cloud

What games are you all putting out? Maybe I'll just buy a bunch...

I hear there's a new college football game coming out next month or so....