LLC Startup Costs vs Organizational Costs?

[CCCBuilder]

I formed an LLC Partnership. I have some costs like the filing fee to form the LLC, the company I paid to form the LLC, and a company for the website, then a company for the business cards.  I assume these are all considered 'startup costs'?

But then I have costs like; the insurance premium for liability insurance (to do construction work), costs to be licensed to do work in my area, and then purchases of new tools for doing the work.

Are these all startup costs? Or are some organization costs? I don't seem to see how the difference is determined but I think I'd like to deduct them this year if possible to avoid the amortization headache.

[Anonymous]

organization costs are section 248 items. These relate to incorporation so technically none of your expenses are 248 items but start-up costs  

startup costs
Definition

Non-recurring costs associated with setting up a business, such as accountant's fees, legal fees, registration charges, as well as advertising, promotional activities, and employee training. Also called startup expenses, preliminary expenses, or pre-opening expenses.

Read more: http://www.businessdictionary.com/definition/startup-costs.html

your liability insurance and tool costs would seem to be recurring.  also see below about tools   

now good news about your startup costs 

You can't deduct these expenses under the general rules for business deductions because only expenses for an existing trade or business can be deducted. And, by definition, you incur your startup expenses prior to the time that your business is born.

Fortunately, there is a way around this dilemma. If your startup expenditures actually result in an up-and-running business, you can:

Deduct a portion of the costs in the first year; and
Amortize (under section 195) the remaining costs (that is, deduct them in equal installments) over a period of 180 months, beginning with the month in which your business opens

If your start-up efforts end in the creation of an active trade or business, then on your tax return for the year the business commences, the amount of expenses that you can deduct will be the lesser of:

Your actual expenses with respect to the new business; or
$5,000, reduced by the amount by which the start-up expenditures with respect to the active trade or business exceed $50,000
The remainder of your start-up expenditures is deducted ratably over the 180-month period beginning with the month in which the active trade or business begins.

What Costs Qualify?
Investigation expenses that qualify include those relating both to business conditions generally, and those relating to a specific business, such as market or product research to determine the feasibility of starting a certain type of business. The costs of checking out the various factors involved in site selection would also be an amortizable investigation expense.In addition, the costs of creating a business include advertising, wages and salaries, professional and consultant fees,

What Costs Don't Qualify?
The following costs don't qualify for the first year deduction and 180-month amortization:

Startup expenditures for interest, real estate taxes, and research and experimental costs that are otherwise allowed as deductions do not qualify for amortization. These costs may be deducted when incurred
The costs attributable to the acquisition of a specific property that is subject to depreciation or cost recovery do not qualify for amortization. Instead, the property should be depreciated under the appropriate rules (for example tools)

[Rick19744]

I am going to deviate somewhat from @Anonymous response.

In general the information is accurate, however, filing fees would be considered an organizational cost.  These costs are "incident in the creation of the partnership".

Direct from the regulations ".....The following are examples of organizational expenses within the meaning of section 709 and this section: Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of a partnership agreement; accounting fees for services incident to the organization of the partnership; and filing fees...."

Any fees you pay to have your operating agreement drafted would also be considered an organizational cost.

Additionally, for a partnership or an LLC taxed as a partnership, organizational costs are known as Section 709 costs (Section 248 relates to corporations which an LLC is not a corporation).

At the end of the day, both types of costs, start-up or organizational are handled the same way for tax purposes.

[CCCBuilder]

Thank you. So the conversation with an accountant before forming the LLC, and the company used to file and form the company are both organizational costs? Then essentially anything after this (that is not going to be an ordinary expense moving forward) would be startup cost? 

I guess I am just worried about classifying these costs as the wrong item.  I was also thinking I would be getting close to the $5k limit...but if my Liability Insurance and Licensing fees are not startup nor organization costs, then I won't be close to the $5k limit in either one.

[Carl]

I haven't read all of the other responses. But basically you either have a Partnership, or a multi-member LLC here. One or the other. Not both.

Either way, neither of those business types have "organizational" cost. They have "start up costs". Your start up costs are those expenses incurred in preparing for business and are incurred before the business is actually "open" for business. Start up costs do not have to be incurred in the same year the business is actually "open" for business. But they can not be claimed until that year. I've known business to have 3-5 years of start-up costs before they are actually "open" and thus required to file a tax return starting that first year. So this is no big thing really.

Your startup costs are limited to a maximum of $5K in the first year you open for business. Anything over that is amortized and deducted over the next 15 years.

[tagteam]

I agree with @Rick19744, organizational expenses for partnerships (or LLCs tax as such) are specified in the Code and Regulations:

I.R.C. §709(b)(1): Allowance of deduction If a partnership elects the application of this subsection......with respect to any organizational expenses....

Treas. Reg. §1.709-2(a): Organizational expenses.....the expenses must be for creation of the partnership and not for operation or starting operation of the partnership trade or business..... 

[Rick19744 cited examples in his post (above)]