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 $25,000 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 $52,400. She proceeds with opening the restaurant, and it begins operations on May 1. Determine the amount 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: $

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

Answer 1

a) Henrietta is in hotel business currently and incurred some investigation expenses for expansion purpose. The same is deductible in the current year. Deduction allowed $ 25,000.

b) In the present case, Henrietta was new in restaurant business. Hence, she can claim part of these investigation expenses. Out of 52,400, amount of 2,600 [5,000 - 2,400 (in excess of 50,000)] can be claimed in the current year.

The balance amount of $ 49,800 (52,400 - 2,600) will be amortized over the period of 180 months at the rate of $277 per month (49,800/ 180).

Business commencing in May, total deductible expenses for opening of new restaurant = 2,600 + 277*8 = $ 4,816.