Question

2-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, 2016.

Stanford incurred the following expenses:

Total investigation costs related to the restaurant $38,750 Total investigation costs related to the bakery 51,400

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 2016 for investigation expenses?

Answer 1

According to the federal tax laws, the expenditure incurred in preparing to open a business is deducted over 180 months. The deduction as expense is based on the criteria mentioned below:

-Deducting a portion in the first year;

-Amortizing the remaining cost over a period of 180 months, starting from the month in which business started.

The first year's deduction can be lower of the following:

-The actual expenses incurred with respect to business

- $5000, reduced by the expenditure relating to such business as exceeding $50000

The remaining expenses are deducted proportionately over a period of 180 months.

Stanford cannot claim expenditure related to restaurant since he did not acquire it.

Amount of deduction for bakery is shown below:

Particulars	Amount
Standard deduction	$3,600
[$5000-($51400-$50000)
Add: Amortization for 2 months	$531
($47800/180*2)
Maximum deduction for 2016	$4,131