Question

Candlewood LLC started business on September 1, and it adopted a calendar tax year. During the year, Candlewood incurred $6,500 in legal fees for drafting the LLC's operating agreement and $3,000 in accounting fees for tax advice of an organizational nature, for a total of $9,500 of organizational costs. Candlewood also incurred $30,000 of preopening advertising expenses and $24,500 of salaries and training costs for new employees before opening for business, for a total of $54,500 of startup costs. The LLC wants to take the largest deduction available for these costs. If required, round any division to six decimal places and use in subsequent computations. Round your final answers to the nearest dollar. How much can Candlewood deduct as organizational expenses

Answer 1

deduction for organizational expenses = $5,000

Explanation:

Since the total startup costs are over $50,000 then the company's deduction will be lower. Generally speaking, a company can deduct up to $5,000 in organizational an startup costs ($5,000 each). But if the costs are over $50,000, then your deduction will be reduced by $1 for each dollar over that threshold.

In this case, organizational costs were $9,500, so they can deduct $5,000 during the first year and $4,500 will be amortized over the next 15 years. Startup costs are $54,500, which means that they can only deduct $5,000 - ($54,500 - $50,000) = $500 during the first year. The remaining $54,000 must be amortized over a 15 year period. Total deduction during the first year = $5,000 + $500 = $5,500