His point was that fast-running base stealers like Ricky Henderson cause the game to slow down as pitchers make countless throws over to first base between occasional pitches to the batter. And those pitchers also frequently step back off the mound, interrupting play to upset the timing of a speedy base-runner.

Entrepreneurial start-up companies are now experiencing their own version of speed slowing the game down. The success of the current economy has dramatically slowed down the formation of new businesses. With less downsizing, better jobs and benefits, and a growing, stable economy producing a healthy demand for recruiting and retaining talented people, fewer professionals are heading off on their own.

Nonetheless, those who choose to start their own business (as well as their tax practitioners) are well advised to carefully study the new Regulations under section 195, which pertain to the amortization of start-up expenditures. They contain a couple of tax traps for the unwary taxpayer that can also expose his or her tax practitioner to serious client dissatisfaction.

Untimely Elections
First is the requirement that the election cannot be made on either a late filed return or an amended return filed after the original due date (including extensions of time) of the return. This is because the Internal Revenue Service takes the position that it lacks authority to extend the time for filing the election under Regulations section 301.9001-3 (which provides for acceptance of late filed elections in several situations).

Consequently, the failure to recognize or otherwise address that an active trade or business is under creation or is acquired, and start-up expenses thus incurred, results in capitalization of those expenses without the ability to amortize them.

Moreover, a literal reading of the statute indicates that not only is no amortization allowable, but there may be no later deduction upon disposition of the business if it is not by "sale or exchange" and it occurs beyond the amortization period.

Section 195(b)(2) permits a section 165 loss deduction only for deferred expenses attributable to the trade or business involved in the start-up that were not allowed as a deduction because of application of section 195. This is the only alternative the section provides to amortization. In a sale or exchange, however, the taxpayer is probably entitled to include the unamortized start-up costs in the basis for determining gain or loss.

More Trouble Around the Corner
The second area where a potential tax trap awaits is in costs and expenses that are capitalized. Items that aggressive clients and tax practitioners treat as immediately deductible, and upon examination of returns later treat as capitalized start-up expenses, may not then be amortized.

The regulations prohibit what is effectively a "late" election for amortization treatment. This is certain to produce tension between practitioners and clients that insist on taking aggressive positions with respect to expenses incurred in start-up enterprises. And by their nature, entrepreneurs are very aggressive folks. Moreover, it is human nature to seek as large an initial "tax subsidy" as possible.

Beware "Specialty Restaurants" and "INDOPCO"
The difficulties in dealing in this area are further complicated by uncertainties surrounding when expenses may be characterized as start-up and when expenses that appear to be start-up expenses may in fact be deductible. Sometimes, the outcome will depend on the form selected for carrying on the start-up activity.

What are start-up expenses? The Senate explanation when the law was added in 1980 stated that it is any expense "which would be allowable as a deduction for the taxable year in which it is paid or incurred if it were paid or incurred in connection with an expansion of an existing trade or business in the same field."

When does start-up cease and business commence? In expanding section 195 in 1984, Congress declared that start-up expenses included "any activity engaged in for profit and the production of income before the day on which the active trade or business begins…" So? I conclude that common sense dictates that start-up expenses cease and operations begin when you open the doors to the end user of a product or service.

Tax practitioners should pay particular attention to the outcomes in TAM 9645002 and Specialty Restaurant Corporation (TC Memo 1992-221).

In TAM 9645002, a revenue agent proposed to disallow deductions for new store expenses incurred for a number of activities by an operator of a chain of retail outlets where the opening of the store was part of a long-term expansion program. The agent relied on the increasingly infamous INDOPCO case [INDOPCO v. Commissioner 503 U.S. 79 (1992)].

Many IRS personnel interpret INDOPCO as standing for the premise that every disbursement might produce a "future benefit" and must therefore be capitalized. While beyond the scope of this article, it clearly does not establish that standard for ordinarily recurring expenditures.

The problem with INDOPCO, though, is what IRS agents have done in its name. You very well might feel comfortable giving the keys to the family station wagon to your teenage son for his Saturday night date. Chances are you would think twice about giving him the key to the Ferrari. In today's world, too many IRS agents are roaring down the tax highway with INDOPCO "to the floor" and no adult supervision along for the ride.

Disregarding the INDOPCO argument, in TAM 9654002, the Service concluded that the "the pre-opening costs are recurring costs that the taxpayer incurs in operating all its stores (and) the recurring nature of these costs should not be capitalized …"

The New Entity Problem
Specialty Restaurant operated through subsidiaries. Thus, a newly formed subsidiary restaurant corporation was denied an immediate and full deduction for pre-opening expenses on the premise that the separate entity was starting a new business (despite the fact that the separate entity would file a consolidated income tax return with the parent).

Using separate legal entities for new stores or locations or expanded operations is common and prudent. It isolates liability and can be a useful tax-planning tool for multi-state or international activities. One way around the capitalization problem is to conduct the start-up activities through an existing business and then transfer the newly established operation to a new subsidiary, tax-free, under section 351.

Another alternative approach is to form a single-owner, limited liability company and elect to be "tax transparent" under the check-the-box entity regulations. The resulting tax-nothing entity should be considered merely an extension of the owner's business for all tax purpose (S corporations can probably also accomplish this through formation of a wholly-owned S subsidiary).

Conclusion
Because of the exposure to client dissatisfaction if overly aggressive deduction policies result in capitalization without amortization upon examination, all practitioners should evaluate start-up expenditure issues in every case. In some of those cases, it may prove wise to confirm in writing with your client his or her acknowledgement and agreement with the position taken on the return.