Question

Henrietta, the owner of a very successful hotel chain in the Southeast, is exploring the possibility of expanding the chain into a city in the Northeast. She incurs $67,000 of expenses associated with this investigation. Based on the regulatory environment for hotels in the city, she decides not to expand. During the year, she also investigates opening a restaurant that will be part of a national restaurant chain. Her expenses for this are $52,200. She proceeds with opening the restaurant, and it begins operations on May 1.

Determine the amount that Henrietta can deduct in the current year for investigating these two businesses.

In your computations, round the per-month amount to the nearest dollar and use rounded amount in subsequent computations.

a. The deductible amount of investigation expenses related to expansion of her hotel chain into another city: $67000

b. The deductible amount of investigation expenses related to opening a restaurant: $ ???

what is b answer? thank you

Answer 1

Answer :

According to the IRS a deduction for startup costs can only be allowed only if the business investigated takes place. A deduction of $ 5000 is provided for startup cost i.e. investigation expenses if startup cost does not exceed $ 50,000 and this cost after reducing the deduction of $ 5000 will be amortized over 15 years from the month of business getting first active. And if the cost of startup exceeds $50,000 then deduction of $ 5000 will get reduced by the amount exceeding $50,000.

In light of the above answers are as follows :

a. Since the business of hotel in another city did not take place, no deduction will be allowed for $ 67000.

b. Deduction of $ 2800 i.e. $ 5000 - $ 2200 will be allowed as deduction for the restaurant business started on May 01. The cost remaining after deduction $ 49400 i.e. $ 52200 - $ 2800 will be amortized equally over the next 15 years.