I noticed that all of us (not all but most of us) are confused with organizational cost, I would like to share and please correct me if I am wrong.
Three scenario:
a) If organisational cost is lower then $5,000 –> Amount / 180 months
b) If organisational cost is higher than $5,000 but lower than $55,000, see example 1
c) If organisational cost is higher than $55,000, same as scenario a) see example 2
Example 1
Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, 2014, and incurred the following costs during 2014:
Legal fees to obtain corporate charter $45,000
State incorporation fees 5,000
Temporary director expenses 2,000
Commission paid to underwriter 25,000
Other stock issue costs 10,000
Brown elects to deduct its organizational costs. In 2014, what is the maximum amount of organizational costs that Brown can deduct?
The organizational expense deduction for 2014 will be:
Legal fees to obtain corporate charter $45,000
State incorporation fees 5,000
Temporary director expenses 2,000
Total $52,000
Since total costs are $2,000 greater than $50,000, the $5,000 portion of the deduction is reduced by $2,000 and the balance of the costs are capitalized and amortized over 180 months.
($5,000 – 2,000) + (($52,000 – 3,000) × (6 ÷ 180)) = $4,633
Example 3
Brand New, Inc., was organized and began active business on January 2, 2014. 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 2014 tax return?
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
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
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