Question

Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2017.

Stanford incurred the following expenses:

Total investigation costs related to the restaurant	$38,250
Total investigation costs related to the bakery	54,500

If required, round any division to two decimal places and use in subsequent computation. Round your final answer to the nearest dollar.

What is the maximum amount Stanford can deduct in 2017 for investigation expenses?

Answer 1

Solution:

Since Stanford is not in the restaurant business and he does not acquire the restaurant, the
$38,250 is not deductible.

He cannot deduct all of the $54,500 related to the investigation of the bakery since he is not in that trade or business already. Since he did purchase the bakery, the maximum deduction (before amortization) of the $54,000 is $5,000.
The $5,000 deduction is reduced for those expenses in excess of $50,000. $54,500 - 50,000 = $4,500 reduction.
$5,000 - $4,500 = $500 deduction.
The remaining expenses of 54,000 ($54,500 - 500) can be amortized over 180 months beginning with the month business begins, which is November.

Monthly amortization = $54,000/180 months = $300 per month.
Amortization expense for 2017 = $300 × 2 months = $600.
Total deduction of investigation expenses for 2017 = $1,100 ($500+ $600).