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 :
Answer: Cherry Corporation’s deduction for organizational expenditures for the current year (2023) would be $10,500.
Explanation:
Organizational expenditures are costs associated with the formation of a corporation, and the IRS provides specific guidelines on how these expenses can be deducted. The key provisions related to organizational expenditures are as follows:
- Section 248 Deduction for Organizational Expenses:
- The IRS allows corporations to deduct up to $5,000 in organizational expenditures in the year the corporation begins business, subject to a phase-out if the total organizational expenditures exceed $50,000.
- For every dollar spent over $50,000, the $5,000 deduction is reduced by that amount. This phase-out starts once expenditures exceed $50,000, meaning if expenditures are over $55,000, no deduction is allowed for organizational expenditures in the first year.
- Expenditures in Excess of $50,000:
- Any organizational expenses above the $50,000 threshold are amortized over a 15-year period. This means that the excess amount is spread out over the next 15 years, with a portion deductible each year.
Calculation:
- Cherry Corporation’s total organizational expenditures amount to $52,700.
- The $5,000 immediate deduction is reduced because the total expenditures exceed $50,000 by $2,700. Reduction of $5,000 deduction:
- $2,700 is subtracted from the $5,000, leaving a maximum immediate deduction of $2,300.
- The remaining organizational expenditures are $52,700 – $2,300 = $50,400.
These expenditures will be amortized over 15 years. Amortization for the first year (2023): - $50,400 ÷ 15 = $3,360.
- Cherry Corporation can deduct $3,360 in 2023 for the amortization of the remaining organizational expenses.
Total Deduction for the Current Year (2023):
- Immediate deduction: $2,300
- Amortization deduction for the first year: $3,360
- Total deduction: $2,300 + $3,360 = $5,660
Thus, Cherry Corporation’s total deduction for organizational expenditures in 2023 is $5,660.
Here is the image showing the breakdown of Cherry Corporation’s organizational expenses and deductions. It highlights the total expenditures, the immediate deduction, and the amortization deduction for the first year, providing a clear view of how the $5,660 total deduction is calculated.