Question

Angie, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Virginia and wants to expand to other states. During 2017, she spends 14,000 to investigate TV rental stores in Maryland and9,000 to investigate TV rental stores in West Virginia. She acquires the Maryland operations, but not the outlets in West Virginia. As to these expenses, Angie should:

1) Capitalize $14,000 and not deduct $9,000.
2) Expense $23,000 for 2017.
3) Expense $9,000 for 2017 and capitalize $14,000.
4) Capitalize $23,000.
5) None of these choices are correct.

Answer 1

Angie should expense the $14,000 spent on Maryland store investigation as she acquired those operations and capitalize the $9,000 for the West Virginia stores as she did not acquire them. So the correct answer is option 3.

Step-by-step explanation:

Angie, who is a calendar year cash basis taxpayer for her TV rental outlets, incurred expenses while investigating expansion opportunities. According to the Internal Revenue Service (IRS) regulations, investigation expenses incurred by a taxpayer in connection with the expansion of an existing business

(Like Angie’s existing TV rental outlets) are generally deducted in the year they are incurred if the expansion efforts are successful. Since Angie acquires the Maryland operations, she can expense the $14,000 associated with investigating these stores in 2017.

However, the $9,000 spent investigating the West Virginia stores, which were not acquired, cannot be currently deducted, and instead, Angie should capitalize these expenses. Hence, the correct action for Angie would be to expense $14,000 for 2017 related to the Maryland investigation and capitalize $9,000 for the West Virginia investigation.