Echo corp is a calendar year taxpayer using the accrual method of accounting. In

Question

Echo corp is a calendar year taxpayer using the accrual method of accounting. In the current year, its boeard of directors authorizes a $10,000 contribution to the girl scouts. Echo pays the contribution on March 10 of the next year. Echo may elect to treat part of all the contributions as having been paid in the current year. If the corporation pays the contribution after March 15 of next year, it may not deduct the contribution in the current year but may deduct it next year. What is your opinion of the client's request?

Explanation / Answer

This rule applies to organizational expenditures incurred after October 22, 2004. Prior to October 23, 2004, a corporation was not allowed an initial deduction but had to amortize its organizational expenditures over a period of at least 60 months beginning in the month it began business. The corporation makes the Sec. 248 amortization election in a statement attached to its first tax return filed no later than the due date of the tax return (including permitted extensions). If the corporation does not make an amortization election, it cannot deduct organizational expenditures until the corporation liquidates. The election applies only to expenditures incurred before the end of the tax year in which the corporation begins business regardless of whether the corporation uses the cash or accrual method of accounting. A corporation begins business when it starts the business operations for which it was organized. Expenditures incurred after the first tax year has ended (e.g., legal expenses incurred to modify the corporate charter) must be capitalized and cannot be deducted until the corporation liquidates.14 Organizational expenditures include expenditures incident to the corporation’s creation; chargeable to the corporation’s capital account; and of a character that, if expended incident to the creation of a corporation having a limited life, would be amortizable over that life. Specific organizational expenditures include Legal services incident to the corporation’s organization (e.g., drafting the corporate charter and bylaws, minutes of organizational meetings, and terms of original stock certificates) Accounting services necessary to create the corporation Expenses of temporary directors and of organizational meetings of directors and stockholders Fees paid to the state of incorporation.15 Organizational expenditures do not include expenditures connected with issuing or selling the corporation’s stock or other securities (e.g., commissions, professional fees, and printing costs) and expenditures related to the transfer of assets to the corporation.

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