"Business Start-Up or Investigatory Expenditures" Incurred by a Taxpayer Who Subsequently Enters the Trade or Business to Which the Expenditures Relate may be Capitalized and Amortized Over a Period of Not Less Than Sixty (60) Months Beginning With the First Month the Corporation is Actively in Business, i.e., After the Charter or Articles of Incorporation is Issued

September 29, 1997 BIR RULING NO. 102-97 31 000-00 102-97 Laya Mananghaya Salgado & Company 3rd Floor Chemphil Bldg., 801 Arnaiz Avenue, Legaspi Village Makati City Attention: Atty . Mariano C . Ereso, Jr . Tax Principal Gentlemen : This refers to your letter dated March 5, 1997 requesting confirmation of your opinion that "business start-up or investigatory expenditures" are in the nature of capital expenditures which may be amortized over a period of not less than sixty (60) months pursuant to Section 120 of Revenue Regulations No. 2. Your letter dated March 5, 1997 states that you are engaged in the practice of accounting and management consultancy; that your foreign investor-clients, long before investments are put in place, incur "business start-up and investigatory expenses" to determine if the areas selected are economically feasible or at least worthwhile pursuing; that business start-up expenses are costs incurred subsequent to an investor's decision to establish a particular business and prior to the time the business actually commences operating (e.g., advertising, market testing and penetration, salaries and wages to train employees, and travel expenses incurred in lining up distributors, customers, etc.); that investigatory expenses consist of costs incurred in reviewing a prospective business prior to reaching a final decision to acquire or enter that business (e.g., costs incurred for analysis or survey of potential markets, labor supply, transportation facilities, location site, etc.); that it is your opinion that by the very nature of these expenses, they may be capitalized and amortized over time provided that they are paid or incurred in connection with creating or investigating the creation or acquisition of a trade or business entered into by the investor. In reply thereto, please be informed that under Section 30 of the Tax Code, as implemented by Section 120 of Revenue Regulations No. 2, organization and pre-operating expenses of a corporation are considered as capital expenditures and are, therefore, not deductible in the year they are paid or incurred. As a matter of accounting practice, said expenses may be treated as deferred expenses and deducted for over a period of not less than sixty (60) months beginning with the first month the corporation is actively in business. Therefore, taxpayers who pay or incur business start-up expenditures and subsequently enter the trade or business to which the expenditures relate can elect to amortize these expenditures over a period of not less than sixty (60) months. The amortization period commences with the month in which the business begins. To qualify for amortization, the expenditure must be one that is paid or incurred in connection with creating or investigating the creation or acquisition of an active trade or business entered into by the taxpayer. The "start-up expenditures" include amounts paid or incurred before, and in anticipation of, the start of the business in an activity for profit or the production of income (par. 1033, page 379, U.S. Master Tax Guide 1985). For this purpose, a corporation is considered to begin business when it commences the activities for which it was organized. Generally, this occurs after the charter or articles of incorporation is issued. (See par. 6163-6164, p. 386, Vol. 34 Am. Jur. 2d, 1976 Ed.) Such being the case, "business start up or investigatory expenditures" incurred by a taxpayer who subsequently enters the trade or business to which the expenditures relate may be capitalized and amortized over a period of not less than sixty (60) months beginning with the first month the corporation is actively in business, i.e., after the charter or articles of incorporation is issued. This rule, however, does not apply to a situation where an existing corporation incurs these same expenditures for the purpose of expanding its business in a new line of trade, venture, or activity. Accordingly, your examples of investigatory expenses which include costs incurred for the analysis or survey of potential markets, products, labor supply, transportation facilities and site location incurred by a taxpayer who subsequently entered the trade or business to which the expenses relate may be capitalized or amortized said expenses over a period of not less than sixty (60) months beginning with the first month the corporation is actively in business. Your examples of start-up expenses such as advertising, market testing and penetration, salaries and wages paid to train employees and travel expenses incurred in lining up distributors and customers are not business start-up expenditures, since they are expenditures incurred when the business has already commenced. Accordingly, they no longer qualify for amortization but would be allowable as a deduction for the taxable year in which they are paid or incurred under Section 29 (a)(1)(A) of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue