Question

Which of the following choices describes how a business should account for organizational expenditures and start-up costs? (Check all that apply.)

a) Deduct all costs in the first year
b) Amortize over 15 years
c) Capitalize and amortize over 180 months
d) Expense in the year incurred

Answer 1

Businesses should capitalize on organizational expenditures and start-up costs, and amortize over 15 years (or 180 months). These are fixed costs that do not vary with production levels.

Step-by-step explanation:

When it comes to how a business should account for organizational expenditures and start-up costs, the correct options in line with the Internal Revenue Code guidelines are: (b) Amortize over 15 years and (c) Capitalize and amortize over 180 months.

These two options are effectively the same, as 15 years equates to 180 months. Businesses must choose between expensing these costs immediately or capitalizing them (recording them as an asset on the balance sheet) and then amortizing the expense over the specified period. These costs are fixed costs; examples include rent on a factory, equipment to produce products, and advertising. They are not variable with the level of production and do not change in the short term. The option to deduct all costs in the first year or expense in the year incurred does not generally apply to organizational expenditures and start-up costs, as there are limitations and conditions under which these could be immediately expensed.