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 $35,500 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 $53,800. 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: $?

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

Answer 1

Even though Hendrietta decides not to pursue the expansion of her hotel chain into another city, the investigation expenses of $35,000 are deductible in the current year. Because Hendrietta is in the hotel business, all investigation expenses associated with the hotel business are deductible in the year paid or incurred. Because Hendrietta was not in the restaurant business, she can deduct only part of these investigation expenses. Of the $53,000, an amount of $2,000 [$5,000 − $3,000 (reduction for excess over $50,000)] can be immediately expensed. The balance of $51,000 ($53,000 −$2,000) is amortized over a period of 180 months at the rate of $283 per month ($51,000 ÷ 180) commencing in September (the month the business is started). Consequently, the total deduction for the year is $35,000 for the hotel investigation + $3,132 [$2,000 + ($283 × 4 months)] for the restaurant investment, or a total of $38,132.

a. The deductible amount of investigation expenses related to expansion of her hotel chain into another city: $35000

b. The deductible amount of investigation expenses related to opening a restaurant: $3132