How to Deduct Organizational Costs for Tax Purposes
What are organizational costs for tax purposes?
Organizational costs are the expenses a company incurs to organize its business structure, such as legal fees for drafting articles of incorporation and CPA advisory fees. These costs are typically incurred before the company begins its business operations.
How much of the organizational costs can be deducted on the first tax return?
Ajax Inc. paid a total of $16,300 in organizational costs, including $11,200 to the attorney and $5,100 to the CPA. To what extent can Ajax deduct these costs on its first tax return?
Answer
Ajax Inc. can deduct $5,377 of its $16,300 organizational costs on its first tax return.
Organizational costs are crucial for forming a business entity properly. However, not all of these costs can be immediately deducted for tax purposes. In the case of Ajax Inc., the company paid $16,300 in total, but only $5,377 can be deducted on the first tax return.
It is important to note that the remaining $11,300 of the organizational costs must be capitalized, meaning they are treated as an asset on the company's balance sheet. This capitalized amount can then be amortized over a period of time.
For Ajax Inc., the capitalized cost of $11,300 can be amortized over 180 months at a rate of $62.78 per month. By following this direction, Ajax can also deduct $377 more from its first tax return, which is equivalent to 6 months of amortization ($62.78 x 6 months).
Therefore, by deducting $5,377 of the organizational costs and amortizing the remaining amount, Ajax Inc. can effectively save on its taxes while complying with the tax regulations related to organizational costs.