Question

home / study / business / accounting / accounting questions and answers / Carol Is A Single Mother Who Owns A Wholesale Auto Parts Distributorship. The Business Is Organized ... Question: Carol is a single mother who owns a wholesale auto parts distributorship. The business is organiz... Carol is a single mother who owns a wholesale auto parts distributorship. The business is organized as a sole proprietorship. Her business has advanced, and she can no longer devote the time necessary to do her own tax return. Because she always has prepared her own return, Carol is familiar with most tax rules applicable to her business and personal affairs. However, she has come to you for advice with respect to a number of items she paid during the current year. You are to determine whether she can take a deduction for the expenditures in the current year. A, Carol purchased a small building on March 2 to use as a warehouse for her auto parts inventory. To purchase the building, she borrowed $180,000 on a 30-year loan and paid $20,000 in additional cash. Carol also incurred $3,200 in legal and other fees to purchase the building. The bank charged her $3,600 in points (prepaid interest) to obtain the loan. After acquiring the building, Carol spent an additional $25,000 to renovate it for use as a warehouse. The $25,000 included $8,000 for painting. B, Carol had her office building painted at a cost of $14,000 and paid $6,000 to have it landscaped. She paid for the building renovation in part a and the office building work by borrowing $60,000 on April 1 at 7% interest. (See part f for details of the interest payments.) C, On April 1, Carol prepaid a 1-year fire insurance policy on her 2 buildings. The policy cost $1,500, and the insurer required the prepayment. On September 1, Carol prepaid a $5,000, 2-year maintenance contract on the buildings. D, Carol started a self-insured medical reimbursement plan for her employees this year. Based on actuarial assumptions, she deposited $13,500 in a fund to pay employees’ medical expenses. Actual payments from the fund totaled $11,200. E, Carol purchased a new automobile costing $32,000. She can document that her business use of the automobile came to 90% and that her out-of-pocket operating costs totaled $3,600. F, Carol paid the following interest on business-related loans: Warehouse $15,300 Office building 4,000 Renovation loan 5,400 The renovation loan was for $60,000. Because she spent only $45,000 renovating the new building and painting and landscaping the old one, she used the additional $15,000 to purchase city of Seattle bonds with a yield of 6%. G, Carol became active in politics and contributed $1,000 to the presidential campaign of an independent candidate. She made the contribution because she believed that, if elected, the candidate would institute policies beneficial to her business. The candidate lost the election and immediately started a grassroots lobbying organization. The purpose of the organization is to keep track of elected officials’ campaign promises and report to the public when they vote contrary to their stated campaign promises. Carol paid $1,600 in dues to join the lobbying organization. H, Carol’s oldest son began college during the current year. She paid his tuition and living expenses, a total of $13,300, out of the company’s checking account. During the summer, her son worked for the business, and Carol paid him $4,300, the same amount she paid other college students working during the summer. Because she consults her son from time to time on the operation of the business, she thinks that at least some of the $13,300 should be deductible. I, Carol has always itemized her deductions. This year, her mother and father retired and could no longer afford the mortgage interest and property taxes on their home. Rather than have them sell the house, Carol made the payments for them. They received a statement from their bank indicating that a total of $8,125 in mortgage interest and taxes were paid in the current year. Carol knows that mortgage interest and property taxes are deductible as itemized deductions and would like to add them to her personal interest and property tax payments. J, Because of the success of her business, Carol has received many offers to invest in various business ventures. One offer was to establish a chain of nursing homes in Florida. Carol spent two weeks in Florida evaluating the prospects of the proposed venture and incurred costs of $2,100. After careful consideration, she decided the venture was too risky and decided not to expand into the health-care business.

Answer 1

Answers
A	In this case costs must be capitalized and amortized as it needed over the life of the loan.
	Her total capitalization of building would be		$        228,200
	As far as the interest she can deduct		100
	for this current year since points must also be capitalized and amortized over life of the loan
B	Painting can be considered as maintenance and therefore it can be deducted, however landscaping is considered as capital expenditure & it has to be added to building's basis
C	If Carol meets legal requirements and she could be able to deduct full $1,500 in current taxable year. In order to qualify for this expense must be immaterial. If carol does not meet requirements then she would be able to deduct dollar 1,125 which is portion allotted for current year. As far as maintenance contract goes she could only deduct 4 months worth of the services which are only ones that is actually take place in current taxable year this would be $833
D	Carol could only deduct actual payments from fund totaled $11,200
E	In this situation 90% of automobile cost could be capitalized & depreciated which would be the total of $28,800. Out of pocket operating costs could be treated as similarly only it allowing Carol for deducting 90% or dollar 3,240
F	Interest of warehouse $15,300 & of office building $4,000 are fully deductible. However carol used part of loan for purchasing Seattle bonds so carol must deduct portion of interest that belongs to bonds leaving her with the total of dollar 4,050 of actual deductible interest for that particular portion.
G	Unfortunately this expenses could not deductible
H	Wages paid to carol's son $4,300 are deductible & it should be treated like any other employee expense, however tuition & living expenses are considered as personal & not deductible as the business expense
I	She cannot include these in her own deductions, however her parents could since payment was made as the gift on their behalf
J	Since no actual business or trade came from this investigation the $2,100 cannot be considered for deductions