How to Amortize Organizational Costs for a Nonprofit
Organizational costs are also known as start-up costs, and nonprofit companies need to take a good look at their projected operational costs and potential fundraising income before the company can begin to offer services. The Internal Revenue Services requires that all for profit and nonprofit businesses capitalize organization costs. These costs are those incurred before a business has active operational activities. Whether they are legal costs related to forming the nonprofit, feasibility surveys or training employees, these costs must be accurately recorded and can be amortized over 15 years.
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Instructions
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Total all costs that can be classified as organizational start-up costs of the nonprofit. These costs should be accessible from the general ledger. The general rule is that all costs incurred before the nonprofit engaged in an active conduct of a trade or before offering services to the public are considered organizational costs.
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Find out if the nonprofit is eligible to immediately deduct organizational costs. You can deduct organizational costs up to $5,000 immediately. If the organizational costs of the nonprofit are $5,000 or less, amortization is not necessary. On the other hand, if the total organizational costs exceed $50,000, you can immediately deduct the value of costs with a reduction on a dollar-for-dollar basis, starting at $50,001. At $55,000 of organizational costs, the nonprofit will not be able to deduct any amounts on an immediate basis.
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Deduct the value of organizational costs you are immediately deducting from the total organizational costs. This figure is the total value of your organizational costs that can be amortized.
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Divide the total amortizable amount of the organizational costs by 15 years. This is the annual deductible amount of the nonprofit’s organizational costs.
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Fill out Section VI of Form 4562, Depreciation and Amortization. For tax purposes, this form needs to be attached to the nonprofit’s tax return, which lists the deductible value of the organizational costs.
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Create an election on a blank sheet of paper or a business letterhead. The IRS requires that the election must contain a description of the business to which the organizational start-up costs relate and a description of each organizational cost that has be incurred. It must also state the month that the active nonprofit began or was acquired as well as the number of months in the amortization period, which should be 180 months (15 years).
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Attach the election, otherwise known as the election under Section 195(b)(1)(A), to the nonprofit’s business tax return.
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