Question

Patin Corporation began business on September 23rd of the current year. It incurred the following costs prior to opening to customers: $26,560 employee training, $5,000 supplies, $41,457 legal, and $10,000 accounting. How much may be deducted in the first year (the current year)? (Round final answer to the nearest whole dollar.)

Answer 1

ANSWER

As per IRS you can deduct $ 5,000 in business start-up costs and $ 5,000 in organizational costs, provided total start-up costs are $50,000 or less. If your start-up costs exceed $50,000 for either start-up cost or organisational cost, the amount of your allowable deduction will be reduced by that dollar amount ie, if $52,000is incurred as start-up costs before launching your business, you will be able to deduct $3,000 only in the first year ($5,000 - $2,000).And if your start-up costs exceeds $55,000, the whole deduction can’t be claimed.

Organizational costs are any costs incurred in the actual formation of a corporation, partnership or LLC. Incorporation fees, for example

1. Partnership filing fees

2. Legal fees for incorporation of the corporation or partnership, eg, for negotiation and preparation of the partnership agreement

3. Accounting fees

4. The cost of organizational meetings

5. The cost of temporary directors

And Start-up costs are expenses that you incur while starting a new business.eg:

1. Employee hiring and training

2. License and permits

3. Technological expenses

4. Borrowing costs

5. Advertising and promotions

6. Equipment and supplies

7. Interest charges

8. Insurance

9. Rent

10. Travel costs

11. Legal expenses

12. supplies you buy before your business begins are start-up expenses

Total Start-up expenses which can't be deducted currently are amortized in equal amounts over 180 months (15 years), starting with the first month you begin business. By dividing the start-up costs by 180 months we can determine the amount to be deducted for each month.

So in this question,

Number of month for the year ending 31st December from 23rd September is 4 months.

Organizational costs is the legal expense of $ 41,457 and,

Start-up costs are:

Employee training cost - $ 26,560

Supplies -                           $ 5,000

Accounting cost -              $ 10,000

Total                                    $41560

So the total total costs is ($ 41560 + $ 41457), $83017

Calculation of deduction available under,

a) Start-up cost

Since start-up cost is less than $ 50000 it can avail deduction of $5000

So amortised value of start-up cost (for which deduction can’t be availed) for the current year is $ (41560-5000)/180* 4, which is equal to $ 812

And

b) Organizational costs

Since organizational costs is less than $ 50000 it can avail deduction of $5000

So amortised value of start-up cost (for which deduction can’t be availed) for the current year is $ (41,457 -5000)/180* 4, which is equal to $ 810.