[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Rules and Regulations]
[Pages 69554-69556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33124]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8797]
RIN 1545-AT71


Election to Amortize Start-Up Expenditures for Active Trade or 
Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning start-up 
expenditures for active trade or business 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 Sec. 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 hours.
    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

[[Page 69555]]

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:


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

[[Page 69556]]

Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                  *        *        *        *        *
1.195-1....................................................   1545-1582.
 
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Bob Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: November 30, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-33124 Filed 12-16-98; 8:45 am]
BILLING CODE 4830-01-U