Question

In 2017, Mark formed ZCo, Inc., A C-Corporation incorporated in the state of California. ZCo, Inc. incurred $37000 in legal fees to draft organization documents, $15000 in accounting fees to establish the company's books and $400 in filing fees with the California Secretary of State office. All of the above expenses were incurred and paid as of January 1, 2017. ZCo, Inc. is an accrual basis taxpayer and operates as a retail company. How much of the above expenses can the ZCo, Inc. deduct on its 2017 tax return?

Answer 1

Z Co. will be able to deduct the amount of $37,000 that it has incurred towards payment of legal fees towards drafting organization documents. This is as per chapters 7 and 8 of IRS Publication 535. This is because here it will be assumed that the legal fees are organizational expenses and is necessary for forming the business structure. It will not be considered as a start up expenses.

The total organizational expenses = 37,000+15,000+400 = 52,400

Organizational expenses up to $50,000 can be deducted as per IRS. Thus Z Co. will be able to deduct $50,000 in its 2017 tax return.