Cherry Corporation, a calendar year C corporation, is formed and begins business on 4/1/2023. In connection with its formation, Cherry incurs organizational expenditures of $52,700. Determine Cherry Corporation’s deduction for organizational expenditures for the current year.
The correct answer and explanation is :
To determine Cherry Corporation’s deduction for organizational expenditures, we need to consider the rules outlined by the IRS for business entities that incur such costs.
Organizational Expenditures:
The IRS allows corporations to deduct organizational expenditures incurred in connection with their formation, with specific rules around the deduction limits. For a corporation, the rules are as follows:
- A corporation can deduct up to $5,000 of organizational costs in the year it begins business.
- The $5,000 deduction is reduced dollar-for-dollar if the total organizational expenditures exceed $50,000. For every dollar over $50,000, the $5,000 deduction limit is reduced by the same amount.
- Any costs that exceed the $5,000 deduction limit are amortized over 180 months (15 years), starting with the month in which the corporation begins business.
Cherry Corporation’s Deduction Calculation:
- Total Organizational Expenditures: $52,700.
- Since these costs exceed $50,000, the $5,000 deduction limit is reduced.
- The reduction amount is: $52,700 – $50,000 = $2,700.
- So, the allowable immediate deduction for organizational expenditures is: $5,000 – $2,700 = $2,300.
The remaining organizational expenditures ($52,700 – $2,300 = $50,400) are amortized over 15 years (180 months).
Amortization of Remaining Expenditures:
- The remaining $50,400 is amortized over 180 months, which means the annual amortization amount is:
[
\frac{50,400}{180} = 280 \text{ per month}
] - For the current year (2023), Cherry Corporation started business on 4/1/2023. This means the corporation is in business for 9 months of 2023 (April to December). Therefore, Cherry can deduct:
[
280 \times 9 = 2,520 \text{ for 2023}
]
Total Deduction for 2023:
- Immediate Deduction: $2,300.
- Amortization for 2023: $2,520.
- Total Deduction for 2023 = $2,300 + $2,520 = $4,820.
This is the amount Cherry Corporation can deduct for organizational expenditures in its first year of business.
The flowchart above visually represents the calculation of Cherry Corporation’s organizational expenditure deduction for 2023. It illustrates the breakdown of total expenditures, the deduction limits, and the amortization process.