Following expenses incurred by Corporation when organized on July 1
Attorney fees to draft charter 20,000
Underwriter fees for stock sale 10,000
Transfer cost for property contributed to the corporation for stock 4,000
Costs of organizational meetings before beginning business 5,000
Costs of directors meetings after beginning business 8,000
Corporation commenced business on September 7. What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending Dec 31?
To determine the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending on December 31, we need to understand the rules regarding organizational expenses.
Organizational expenses are the costs that a corporation incurs in the process of establishing the corporation, such as legal fees, accounting fees, and other expenses related to the organization of the business.
According to the Internal Revenue Code (IRC) Section 248, a corporation may deduct up to $5,000 of organizational expenses in the year in which the corporation begins business. However, this deduction is reduced by the amount of organizational expenses that exceed $50,000.
In this case, the expenses incurred by the Corporation when organized on July 1 are as follows:
- Attorney fees to draft charter: $20,000
- Underwriter fees for stock sale: $10,000
- Transfer cost for property contributed to the corporation for stock: $4,000
- Costs of organizational meetings before beginning business: $5,000
- Costs of directors meetings after beginning business: $8,000
To calculate the maximum deduction for organizational expenses, we need to sum up the expenses that fall within the definition of organizational expenses. In this case, the expenses that can be considered as organizational expenses are:
- Attorney fees to draft charter: $20,000
- Underwriter fees for stock sale: $10,000
- Transfer cost for property contributed to the corporation for stock: $4,000
The total of these expenses is $34,000. Since this amount is below the $50,000 threshold, the corporation can deduct the full $34,000 as organizational expenses for the first tax year ending on December 31.
Therefore, the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending on December 31 is $34,000.