Question

Cruise Corporation (a C corporation) is incorporated on February 1 and begins business on June 1. The corporation's tax year ends on December 31. Cruise incurs the following expenses during the year:

Month Type    Amount

March Draft charter   $32,000

April    Stock commission       $10,000

May     Accounting fees          $21,000

What is the deduction for organizational expenses if Cruise chooses to deduct its costs as soon as possible?

Select one:

a. $5,117

b. $5,000

c. $3,983

d. $2,450

Answer 1

Ans:

Start up expense deduction calculation:

A business is allowed for deduction upto $5,000 for expense done under $50,000 during the year. The deduction phase out after the expenses was above $50,000 by $1 for each $1 expense. So after total expense of $55,000 no initial year deduction will be availbale. Balance of Expense must be amortised over a period of 180 months.

So here:

Total Expense: $32,000 + $10,000 + $21,000 = $63,000

Initial deduction will not be available as expesne is above $55,000. Total expense will be amortised over 180 months.

No. of months business during the year = 7 (June to december)

Deduction for organizational expenses if Cruise chooses to deduct its costs as soon as possible will be:

= (7/180)*$63,000 = $2,450

So Correct answer is option D.

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!