🎥+✏️Organizational Expenditures & Startup cost🟢

Responses

1. 

   Alexey Ravin 25 November 2023

   I have a question – what will happen with the organizational expenses that were accrued in the second year, if they are not allowed to be amortized, what is going to be with it, they will be just lost?

   1. 

      Mansour Farhat 28 November 2023

      HI Alexy,

      there should not “organizational expense” for year 2. If ordinary and necessary, it will be expensed.

      I hope this helps.

      1. 

         Dmitriy Makarenko 5 March 2024

         So of they are expensed, would that be better than amortizing it? Since only 5k allowed, and if you incur 25k the following year, you are expending the whole thing? Am I missing something?

         1. 

            Maroun, CPA 12 March 2024

            Hello Demitriy,

            Organizational expenditures are typically incurred once when a business is being established. There would be no organizational expenses after the business is established.
            A business has the option to deduct up to $5,000 of these expenditures in the year they are incurred subject to the limitation mentioned in the lecture. Any amount over $5,000 must be amortized over 180 months (15 years). By expensing the $5,000 in the year the expenditures are incurred, the business can reduce its taxable income for that year, resulting in immediate tax savings. The immediate tax savings from expensing the $5,000 can improve the business’s cash flow in the short term. This can be important for a new business that may have limited operating capital and needs to manage its cash resources carefully.

            I hope this makes sense!

         2. 

            Wendy Vargas 18 April 2025

            I had the same question and thought. I would rather expense the $25,000 in the following year than amortized it over 180 months with the $60,000.

            1. 

               Maroun, CPA 22 April 2025

               Hi Wendy,

               A company has to incur its organizational costs before it can legally begin business. Think of the lawyer’s fee for drafting articles of incorporation, state filing fees, and so on. Those bills come first, then the doors open. There’s no way you can defer them till after the business starts.

               I hope this makes sense!

2. 

   Binh Gegel 8 December 2024

   Dear Professor Farhat,
   I have a question: a company paid some research and legal fee on Nov 2023 and start doing business in 2024. They used cash method. Can they still deduct these fee as start – up cost?
   Thank you

   1. 

      Maroun, CPA 11 December 2024

      Hello Binh,

      Under the cash method of accounting, expenses are generally deducted when paid. However, start-up costs follow different rules. Start-up costs are not immediately deductible. Instead, the IRS allows:
      – An initial deduction of up to $5,000 for start-up costs in the year the business begins (2024 in this case), subject to a phase-out if total start-up costs exceed $50,000.
      – Any remaining start-up costs must be amortized over 180 months (15 years), starting in the month the business begins operations (2024).

      Even though the company paid these expenses in 2023, they would be classified as start-up costs and treated accordingly when the business begins in 2024. Using the cash method does not allow the company to deduct these expenses in 2023 since they relate to starting the business in 2024.

      If the legal fees were for activities such as drafting incorporation documents, filing state paperwork, or creating a partnership agreement, they are considered organizational costs, not start-up costs.
      However, if the legal fees were for activities like negotiating leases, setting up supplier contracts, or other preparatory work for starting the business, they would qualify as start-up costs.
      The organizational costs and start-up costs are treated similarly but reported separately, with each allowing the company to deduct up to $5,000 in addition to the amortization.

      I hope this clarifies your question! Let me know if you need further assistance.

3. 

   SONNY SINGH 6 January 2025

   Hi Professor,
   Q – If you formed the business on Jan 2021 and you are building the building for two years and opened the business doors on Jan 2023, when can you start the amortization of the building cost, and equipment Convenience Store for LLC?
   A.