A C Corporation incurs $55,000 in organizational costs to start the business. It begins business on July 1, Year 1. What is the maximum deduction for organizational costs in Year 1?

Q: What mistakes do candidates make on this CPA question?

Taking the $5,000 deduction despite the phase-out.

Answer options:

$5,000

$1,667

$1,833

$3,667

How to approach this question

1. Calculate Immediate Deduction: $5,000 - (Total Costs - $50,000). If <0, then 0. 2. Amortize the REST (Total - Immediate) over 180 months. 3. Multiply by months in service.

Full Answer

C.$1,833✓ Correct

IRC §248 allows $5,000 immediate expensing, phased out dollar-for-dollar for costs exceeding $50,000. Excess = $5,000. Immediate deduction = $5,000 - $5,000 = $0. The full $55,000 is amortized over 180 months. Monthly = $305.55. For 6 months = $1,833.

Common mistakes

Taking the $5,000 deduction despite the phase-out.

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