Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series. It presents wealth managers with information on the start-up expense deduction as well as general information on tax law.

Here at Advanced Markets FYI, we’ve been working in tax law as applied to wealth management for a number of years, and must say it is rare to see mistakes by the Department of the Treasury. In fact, the general practice of a tax lawyer is to read a particular Code Section and corresponding Treasury Regulations multiple times until it finally makes sense. There are however, some instances where no matter how many times you read a Code Section and/or Treasury Regulation something does not add up.

At this point you have a few options. First, maybe you re-read it because chances are the Department of the Treasury and IRS did not made a mistake. As a general matter, it is unusual to find authoritative text that contains an error. So maybe by this point you’ve now corrected your misunderstanding with another proper reading taken with the underlying premise that the Treasury does usually not foul up. If you are still not sure that what you’re reading makes sense, it may be helpful to find more information about the subject. For example finding articles, journals or papers written on the subject will generally add clarity to a particular issue. However, the specific facts and circumstances upon which you are trying to apply the Code or Regulations are commonly unique. Furthermore, not every tax subject or Code Section is written about extensively elsewhere.

Now assuming you’ve spent significant time and diligence reading the primary source and looking for secondary sources to gain a better understanding, it’s then time to break out the big guns. The way we see it is, you have two options at this point. You can find a tax expert to examine the subject in detail with your particular question in mind. It is usually helpful to ask questions and work your way through a problem with another expert who sees the world slightly different than yourself (slightly is used as a relative term in this context). However, if you still don’t have the answer you’re looking for, you can always Blog about it!

Thus, we believe we have come across an error in the Code and Regulations (frankly we think they should give an award when this happens, but we attribute non-recognition to lack of funding anyway). We therefore put it up to you to prove us wrong…

The Small Business Jobs Act of 2010 Section 2031 amends Section 195 Subsection b of Title 26 of the United States Code. The amendment to the Code allows for a $10,000 deduction for start-up expenses with a reduction in the deduction for expenses over $60,000 after Dec. 31, 2009.[1]

Further, the IRS website states (although not authoritative):

Sect. 2031: Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures, but requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. [2]

However, the Regulations nevertheless say something else… They appear to have not been amended along with the Code Section; thus the deduction allowed under the Treasury Regulations is only $5,000 (as was the limit before enactment of Section 2031 of the Small Business Jobs Act). Take a look for yourself. What is really interesting (at least to some tax professionals) is that Treasury Regulation Section 1.195 has been reversed and in its place one may be directed to Section 1.195-T or Temporary. Since the Temporary Regulation Section expires during 2011, perhaps it was not amended on purpose? All the same, the guidance is not in accordance with the Code. However, it is not likely that any court would determine the mismatch of information as anything other than an administrative oversight and most courts would likely follow the amended Code section’s limits as passed by Congress.

Next week’s blogticles will present new wealth management ideas for the Second Quarter 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See The Small Business Jobs Act of 2010. PL 111–240, Sept. 27, 2010. Section 2031(a); 26 U.S.C. 195(b).

[2] See Internal Revenue Service. “Small Business Jobs Act of 2010 Tax Provisions”. http://www.irs.gov/businesses/small/article/0,,id=230307,00.html. Page Last Reviewed or Updated: February 16, 2011. Last Accessed 3/22/2011.

Tags: Internal Revenue Code, Internal Revenue Service, Tax, Tax deduction, Tax law, Treasury Department, Treasury Regulations, United States Department of the Treasury

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