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Topic
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NINJA Question –
Brand New, Inc., was organized and began active business on January 2, 2015. Brand New incurred the following expenses in connection with creating the business:
State incorporation fees $ 5,000
Legal fees for drafting the charter 35,000
Printing costs for stock certificates 10,000
Professional fees for issuance of stock 15,000
Broker’s commission on sale of stock 25,000
Expense for the temporary directors 20,000
Total $110,000
What is the maximum amount of organization expense that Brand New may deduct on its 2015 tax return?
A.$4,000 (CORRECT)
B.$5,000
C.$8,667
D.$12,000
SOLUTION:
Organization expenses are those expenses connected directly with the creation of the corporation. These include:
Expenses of temporary directors $20,000
Fees paid to a state for incorporation 5,000
Accounting and legal fees incident to organization 35,000
Total $60,000
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Total organization expense is over $55,000, so the entire amount must be capitalized and amortized over 180 months.
$60,000 × (12 ÷ 180) = $4,000
For organizational expenditures incurred after October 22, 2004, taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period.
My question is that the problem doesn’t give you anything about “Accounting and Legal fee incident to organization” but solution calculates $35,000 of that. The “Legal fee for drafting charter” can’t be another word for the above, no?
Thanks.
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