Green Corporation is incorporated on March 1 and begins business on June 1. Green's first tax year ends on October 31, i.e., a short year. Green incurs the following expenses during the year: What is the deduction for organizational expenses if Green chooses to deduct its costs as soon as possible?

Question

Green Corporation is incorporated on March 1 and begins business on June 1. Green's first tax year ends on October 31, i.e., a short year. Green incurs the following expenses during the year:  What is the deduction for organizational expenses if Green chooses to deduct its costs as soon as possible?

Quizplus · Accepted Answer

Organizational expenses incurred before the start of business are generally amortized over 180 months. However, under Section 195, a taxpayer may elect to deduct a limited amount of organizational expenses in the year the business begins. For the 2020 tax year, the maximum amount of organizational expenses that can be deducted in the first year is $5,000 with a phase-out threshold of $50,000.

Green Corporation began business during the tax year, so it is eligible to make this election. The total amount of organizational expenses incurred during the year was $36,000, but only $5,000 can be deducted in the first year. Therefore, the deduction for organizational expenses is $5,000.

Green Corporation Is Incorporated on March 1 and Begins Business