Question

34. Daniel is single and has the following income and expenses in 2017:

Salary income $60,000

Net rent income 6,000

Dividend income 3,500

Payment of alimony 12,000

Mortgage interest on residence 4,900

Property tax on residence 1,200

Contribution to traditional IRA 5,000

Contribution to United Church 2,100

Loss on the sale of real estates (held for investment) 2,000

Medical expenses 3,250

State income tax 300

Federal income tax 7,000

a. Calculate Daniel’s AGI.

b. Should Daniel itemize his deductions from AGI or take the standard deduction? Explain.

41. Nancy, 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 $35,000 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 expense for this are $53,000. The restaurant begins operations on September 1. Determine the amount that Nancy can deduct in the current year for investigating these two businesses.

Answer 1

34.

Gross Income:
Salary Income	$60,000
Net Rent Income	$6,000
Dividend Income	$3,500
		$69,500
Deductions for AGI :
Alimony paid	$12,000
Contribution to traditional IRA	$5,000
Loss on sale of real estate	$2,000
		($19,000)
Adjusted Gross Income		$50,500

b. Daniel itemize his deductions from AGI or take the standard deduction

Itemized Deductions
Mortgage Interest on residence	$4,900
Property tax on residence	$1,200
Contirbution to United Church	$2,100
State Income Tax	$300
Medical expenses	$0
Total Itemized Deduction	$8,500

Since the standard deduction for 2017 ($6,350) is less than Daniels itemized deductions($8,500), Daniel should itemize his deductions from AGI. The Federal income tax of $7,000 isnot deductible.

41.Determination of the amount that Nancy can deduct in the current year for investigating these two businesses.

Even though Nancy decides not to pursue the expansion of her hotel chain into anothercity, the investigation expenses of $35,000 are deductible in the current year. BecauseNancy is in the hotel business, all investigation expenses associated with the hotelbusiness are deductible in the year paid or incurred. Because Nancy was not in therestaurant 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 amortizedover 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.