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Level 1

Organizational and Startup Costs

Not to beat a dead horse, but I need a little help figuring out organizational and startup costs. My team just started a new company, so we have incurred a number of organizational costs (LLC filing/etc), and startup costs (logo, design, hosting). 

Me and my partners (4) split these costs personally, until we open the business account. So I have been treating the costs as contributed capital from each partner, and creating an asset. 

For example: 

Debit Organizational Costs (other asset) $600

Credit each Partner Contribution account equally. $150 x 4

I can assign a name/vendor to each transaction, but its obviously not going through their individual register. 

My question is, am I doing this right? Also, how should I amortize these costs once trade/business begins? I know the IRS says I can deduct up to $5000 each the first year (is that still considered an amortization expense?)

Thanks for any tips!

Solved
Best answer 10-15-2018

Best Answers
Highlighted
Level 15

Organizational and Startup Costs

yes you are doing it right

in the memo block of each enter startup costs, then when you file taxes the first time, be sure to have the tax accountant know about them

rather than use an asset account for things like that, use an expense account called start up expenses.  If necessary the tax accountant will reclassify those that need to be, but so far they are all expenses

don't worry about amortizing them, let the tax accountant make that decision

View solution in original post

7 Comments
Highlighted
Level 15

Organizational and Startup Costs

yes you are doing it right

in the memo block of each enter startup costs, then when you file taxes the first time, be sure to have the tax accountant know about them

rather than use an asset account for things like that, use an expense account called start up expenses.  If necessary the tax accountant will reclassify those that need to be, but so far they are all expenses

don't worry about amortizing them, let the tax accountant make that decision

View solution in original post

Highlighted
Level 1

Organizational and Startup Costs

Thank you, that's it.

I think I just keep getting tax issues mixed up with financial accounting. I will expense them until tax time.

For anyone else interested refer to FASB SOP 98-5 for treatment of organizational and startup costs for financial/tax reporting.
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Level 1

Organizational and Startup Costs

Ok, so I changed things around to reflect a equity contribution into the business by the partners, then expensed the startup cost with the applicable vendors. However, one thing I immediately notice is equity is reduced to zero on the balance sheet due to negative net income moving to RE. Is that equity reduction the correct outcome for our contribution/investment in the business?
Highlighted
Level 15

Organizational and Startup Costs

with no income on the books yet, net income will be negative, all you have is expenses
Highlighted
Level 1

Organizational and Startup Costs

I think some of your "startup costs" are actually intangible asset costs, such as your brand development and logo. Those are what creates goodwill when you sell your company or otherwise dispose, so they are not usually expensed.

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Level 1

Organizational and Startup Costs

What expenses go into Start up cost for tax purposes vs for our books?

 

Before opening the business, we incur in other expenses to have all merchandise ready to sell such as, packaging, storage containers for inventory, inventory, pay email set up , website.

Are those part of my start up cost. Each partner also paid for different things.

I recorded as follows,

 

XXX Vendor Name          00.00

Partner 1 contribution                 00.00 Memo Website

 XXXX Vendor Name      00.00

Partner 2 Contribution                 00.00  Design for product

Is this correct?

 

Now, we are continuing to do business but putting money into the business

 

Office Supplies XXX Vendor                    00.00

                             Partner 1 Contribution           00.00  etc...

 

How then will we know what to amortize and what not?

 

 

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Level 1

Organizational and Startup Costs

My client paid $75,000 for territorial rights out of his own pocket for his start-up.  Because he used his personal capital for this transaction, I have created a Journal Entry as follows: 

 

Credit  Notes Payable - $75,000.00

Debit   ???                     - $75,000.00

 

I am trying to decide.... do I create an Asset account and call it "Territory"? But it's not a tangible asset that can be depreciated. We can't expense it as "Start-up Costs" on the P&L. That's too large.   I am not sure how we should account for it? Suggestions? 

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