Reconciling Book/Tax Treatment of Startup Costs: Deferred Tax Assets and Liabilities, Schedules M-1 and M-3, Partnership Provisions

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, July 12, 2016

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Course Materials

This course will provide tax advisers and compliance professionals with guidance on navigating the often complex differences in reporting business startup costs between book/financial statement reporting and tax treatment. The panel will discuss expenditures that should be classified as startup costs, detail the specific tax rules that create deviations between financial and tax treatment of those costs, and drill down into reporting book/tax differences on Schedules M1 or M3 of Form 1120. The webinar will also explore treatment of partnership organization and syndication costs.


An often significant challenge for tax advisers is properly calculating and reporting the differences in treatment of business organization costs between financial accounting standards and tax requirements. For book purposes, startup costs (also referred to as pre-operating costs or organization costs) are treated in a straightforward manner and are deducted as incurred. For tax purposes, however, these costs must be broken out into separate subcategories, many of which incur different tax treatment than straight expense deductions.

There are several provisions in the Code that specify how certain expenditures classed as startup costs must be treated for tax purposes. The basic framework for reporting “start-up expenditures” is found in Section 195, which defines startup costs as any amounts incurred to either investigate the potential of creating or acquiring an active trade or business, or in actually creating an active trade or business.

Section 195 also provides the option to elect and amortize startup costs, and sets the limits for those deductions. Additionally Section 197 offers guidance on how to treat intangibles related to business startups. The disparate book/tax treatment of startup costs requires tax advisers to maintain separate schedules to report on Schedule M-1 or Schedule M-3 of the Form 1120 tax return.

There are also differences in the Code for handling partnership startup expenses, with IRC 709 setting rules for dealing with partnership syndication costs as a component of start-up expenditures. Partnership advisers need to especially understand the differences in deductibility of unamortized costs in a partnership termination before the amortization period expires.

Listen as our experienced panel provides a comprehensive look on reconciling the book/tax treatment of startup costs.



  1. General financial accounting treatment of organization and startup costs
  2. Sources of tax rules requiring differences in book/tax treatment
    1. IRC Section 195
    2. IRC Section 197 intangibles
  3. Amortization elections
  4. Reporting startup cost book/tax differences on Schedules M-1 or M-3
  5. Partnership reporting of book/tax differences including syndication costs
  6. Disposition of business before end of amortization period
  7. Effect of tangible personal property regulations on certain startup costs


The panel will discuss these and other important questions:

  • How to treat Section 197 intangibles as startup costs
  • How to treat gain/loss on disposition of business prior to the end of amortization period of organizational costs
  • Reporting book/tax differences for startup costs incurred by a partnership
  • Special rules for treatment of partnership syndication costs


Michael J. Santo, CPA, MBA, MST
Michael J. Santo, CPA, MBA, MST

Tax Manager

Mr. Santo concentrates his taxation practice in corporate, partnership, and multistate taxation, with significant...  |  Read More

Rachael A. Arteaga
Rachael A. Arteaga

McGlinchey Stafford

Ms. Arteaga's tax practice focuses on federal, state, and local tax issues, legislative and administrative...  |  Read More

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