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