What are Ajax Inc.'s organizational costs and how much can they deduct on their first tax return?

What are the organizational costs incurred by Ajax Inc. and how much can they deduct on their first tax return? Ajax Inc. incurred organizational costs of $13,200 paid to the attorney for drawing up the articles of incorporation and $7,100 paid to the CPA for advice on accounting and tax implications. The total organizational costs amount to $20,300.

Organizational Costs

Organizational costs are the costs associated with the formation of a corporation or partnership. These costs include legal fees, accounting fees, and other expenses incurred in setting up the business entity.

Deduction on First Tax Return

For organizational costs up to $50,000, a deduction of $5,000 is allowed. The remaining non-deductible expenses are then spread out over a period of 180 months. In the case of Ajax Inc., their total organizational costs of $20,300 exceed the $5,000 deductible limit.

The non-deductible cost for Ajax Inc. would be calculated as follows:

($13,200 + $7,100) - $5,000 = $20,300 - $5,000 = $15,300

The capitalized cost for amortization purposes is then calculated as:

$15,300 / 180 months = $85 per month

Given that Ajax Inc. began business operations on July 15 and there is an amortization period of 6 months in the first tax year, the capitalized cost would be:

$85 x 6 months = $510

Therefore, the amount that Ajax Inc. can deduct on its first tax return is:

$5,000 + $510 = $5,510

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