Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Capitalizing startup costs…

Posted by taxguru on November 18, 2007

Q:

Subject: Depreciation on web site enhancements and portal additions

We are an HMO with website for “E-Health”, designed to enable employees, clients, brokers, practitioners, etc to access info on claims, broker checks, practitioner info/update etc.  We have previously expensed costs associated with this site, to the tune of 800K.  

 

We are now expanding, adding portals, new software, accessibility, info expansion, in the amount of 1.2 million, using third-party vendors. Is there any part of this that can be capitalized?  (Can we change horses in midstream)?

 

Additionally, we have a contract vendor on-site.  We pay them a monthly fee for maintaining all our applications.  All this is expensed as consulting.  If we use folks from this contract pool to develop, train, implement this project, we can’t very well capitalize these costs.  But if we have a special “project contract” with this vendor, for a certain cost, etc., wouldn’t we be able to capitalize this labor?

 

Thanks for your help–our object is to capitalize as much as possible.  If there is a good place to go (besides you!) to get answers, please let me know.  I’ve downloaded every IRS publication I can find on depreciation already and haven’t found an answer.

 

A:

I don’t mean to cop out on this kind of issue; but there is no place to go to help decide how to properly handle the capitalization of start-up costs.  There are several ways in which it can be handled.  That kind of decision requires a lot of analysis of your past, current and future circumstances by an experienced professional tax and accounting advisor. This is in no way something you can do on your own.

Frankly, I find it shocking that you would invest two million dollars in a business start-up without the assistance of tax and accounting professionals from the very beginning.  That is extremely reckless and dangerous on so many fronts.  If that was all your own personal money being used, I guess you will be learning some expensive lessons.  However, if you are using money from outside investors, operating without competent tax and accounting professionals, you are exposing yourself to lawsuits by the investors for fiduciary negligence.

I realize this isn’t the kind of response you were expecting; but anything else would be irresponsible.

Good luck.

Kerry Kerstetter

 

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