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 :
Cherry Corporation, which began business on April 1, 2023, incurred organizational expenditures totaling $52,700. Under the Internal Revenue Code (IRC) Section 248, the corporation can deduct a portion of its organizational expenditures in the first year of business, with the remainder amortized over a 15-year period.
Deduction Calculation:
- Initial Deduction for Organizational Expenses:
- For a C corporation, it can immediately deduct up to $5,000 of organizational expenses in the first year of business. However, the deduction is reduced if the total organizational expenses exceed $50,000.
- Since Cherry Corporation’s organizational expenditures are $52,700, which is more than $50,000, the $5,000 immediate deduction is reduced by the excess amount over $50,000.
- The excess amount is $52,700 – $50,000 = $2,700. Therefore, the initial deduction is reduced by $2,700.
- $5,000 – $2,700 = $2,300.
- Amortization:
- After the initial deduction, the remaining organizational expenditures of $52,700 – $2,300 = $50,400 must be amortized over 15 years.
- The annual amortization for the remaining expenses is $50,400 / 15 years = $3,360 per year.
Cherry Corporation’s Deduction for the Current Year (2023):
Since the business begins in April, the corporation can deduct a portion of the amortization for 2023. The corporation is in business for 9 months of the year (from April 1 to December 31).
- For 2023, the amortization deduction would be: $3,360 × (9/12) = $2,520.
Thus, Cherry Corporation’s total deduction for organizational expenses in 2023 is:
- Initial deduction: $2,300
- Amortization for 2023: $2,520
- Total deduction for 2023 = $2,300 + $2,520 = $4,820.
Explanation:
- Section 248 allows C corporations to deduct a portion of their organizational expenses in the year they begin business, with the balance amortized over a 15-year period.
- Cherry Corporation can only deduct $2,300 immediately due to the limitation on the $5,000 deduction.
- The remaining amount is amortized over 15 years, with the corporation claiming a pro-rata deduction for the year it begins business.