Organizational, Start-Up and Research Costs

Organizational costs — §248

• Costs incident to creating the corporation, chargeable to capital, and of a kind that would be amortized over the corporation’s life if it had one (§248(b)): legal fees for the charter, bylaws, minutes and stock certificate terms; accounting fees for the organization; expenses of temporary directors and organizational meetings; state incorporation fees. Must be incurred before the end of the first tax year in which the corporation is in business (Reg. §1.248-1(b)).
• Not organizational: commissions, printing and professional fees for selling stock or bonds (they reduce the capital raised, as under GAAP); costs of transferring assets to the corporation; reorganization costs.
• Treatment (corporations formed after October 22, 2004): elect to expense up to $5,000 in the first year, reduced dollar-for-dollar by the excess of total organizational costs over $50,000 (fully phased out at $55,000); amortize the balance over 180 months beginning with the month the corporation begins business.
• For costs after September 8, 2008 the election is deemed made — no statement, just Form 4562. To forgo it and capitalize, do so affirmatively on a timely filed return. Either choice is irrevocable.
• “Begins business” is a facts question. Getting the charter is not enough; acquiring the operating assets the business needs is a good sign it has begun (Reg. §1.248-1(d)).

Start-up costs — §195

• Costs paid or incurred to investigate creating or acquiring an active business, to create one, or in a for-profit activity before the active business begins, that would have been deductible if incurred by an operating business in the same field (§195(c)). Examples: travel, market and feasibility studies, consultants; pre-opening rent, utilities and salaries; hiring and training; pre-opening advertising.
• Excluded by statute: interest, taxes, and research and experimental costs — each has its own rules. Costs that attach to an asset (delinquent taxes paid at closing, remodeling) go into basis.
• Same treatment as organizational costs: $5,000 in the year the active business begins, phased out above $50,000, remainder over 180 months from that month. Deemed election after September 8, 2008; Form 4562 Part VI.
• If the corporation goes out of business before the 180 months are up, the unamortized balance is deducted in the final year (§195(b)(2)).
• A business that is investigated and never started: the costs are not deductible unless the taxpayer was already in the same line of business. (A one-liner from the depreciation notes, and still right.)

Research and experimental costs — §174, now §174A

This section changed twice since the course. The course describes the pre-2022 law: expense, amortize over 60 months, or write off over 10 years. The 2017 act then required all research costs for tax years beginning after 2021 to be capitalized and amortized — 5 years domestic, 15 years foreign — with no expensing option. The July 2025 law reversed that for domestic research with new §174A, effective for tax years beginning after December 31, 2024. What follows is the course’s material on what counts as R&E, which did not change, and then the current treatment.

What counts

• R&E costs are research and development costs in the experimental or laboratory sense — incurred to eliminate uncertainty about the development or improvement of a product, process, formula, invention, technique or similar property (Reg. §1.174-2(a)). In-house or contracted out. The cost of obtaining a patent is R&E.
• Not R&E: ordinary quality-control testing; efficiency surveys; management studies; consumer surveys; advertising and promotion; literary and historical research; the cost of acquiring someone else’s patent, model or process.
• Land and depreciable property used in research are not R&E costs, but the depreciation on property used directly in research is.
• Paying a third party to build an asset is R&E only if the work is at the taxpayer’s risk. A machine bought under a guarantee that it will do a specified job is a purchase, not research.

Treatment, as taught (tax years beginning before 2022)

• Three choices, made in the first year the costs are incurred and binding for that project thereafter: (1) deduct currently; (2) capitalize and amortize over not less than 60 months beginning with the month benefits are first derived; (3) capitalize and write off over 10 years from the month incurred (§59(e)). No election at all meant capitalization with no deduction until IRS permission.
• A profitable company expensed; a start-up with no income deferred. The research credit (§41) was usually worth more than the deduction, and the deduction had to be reduced by the credit unless the reduced-credit election was made.

Treatment now (tax years beginning after 2024) updated 2026

• Domestic research (§174A): deduct in the year paid or incurred, or elect to capitalize and amortize over not less than 60 months from the month benefits are first derived — the course’s first two choices, restored. The §59(e) 10-year election also remains available. check Confirm the election mechanics under Rev. Proc. 2025-28 and any successor.
• Foreign research (§174): still capitalized and amortized over 15 years, mid-year convention. No expensing.
• Catch-up for 2022–2024 domestic costs still being amortized: deduct the unamortized balance in the first tax year beginning after 2024, or spread it over that year and the next. A small business (gross receipts $31 million or less) may instead elect to apply §174A retroactively to 2022 by amending those returns.
• Software development costs are treated as research costs under §174A, as they were under the 2022–2024 regime.
• Research credit coordination: §280C(c) reduces the §174A deduction by the credit claimed, unless the reduced-credit election is made on a timely original return.
• Depreciable property used in research is still depreciated, and its depreciation still counts as a research cost.

Study questions 20–26

• SQ 20. Not an organizational cost: broker fees for selling common stock. Accounting fees to set up the system, charter legal fees, and temporary directors’ expenses all are.
• SQ 21. G’s Whitewater: organizational meeting $500, charter legal fees $2,000, state fees $100, temporary directors $200, accounting fees for incorporation $800; plus broker fees $10,000, a regular directors’ meeting $300, 12 months of insurance $2,000, and post-year-end charter changes $500. First-year organizational deduction: $3,600 — all five qualifying items, under the $5,000 cap.
• SQ 22. Not a start-up cost: interest on a remodeling loan before opening. Interest is excluded by §195(c). Advertising the opening, market surveys and the first month’s rent all qualify.
• SQ 23. R&E: attorney fees to have the patent approved. The research equipment itself is capitalized; plant efficiency and consumer preference studies are ordinary expenses.
• SQ 24. Not R&E: market testing of a new chewing gum. Developing a formula, hiring a third party to create software, and improving a product’s taste are all research.
• SQ 25. Electronic Wizards, October 31 year, elects 60-month amortization; laser perfected and marketed in August of Year 2; two years of costs: supplies $10,000, salaries $50,000, utilities $5,000, equipment $75,000 (5-year straight-line, $15,000 a year). Year 2 deduction: $4,750 — pool $95,000 (the costs plus two years of depreciation), 3/60 for August through October.
• SQ 26. No income this year, large profits expected: capitalize and amortize over not less than 60 months, matching the deductions to the income.

Private reference, not client advice. Notes taken from a 2019 continuing-education course (Thomson Reuters Checkpoint Learning, C Corporations — Overview of Corporate Income Tax); figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2024-40, Rev. Proc. 2025-32). Verify current-year amounts before relying on them.