Question

Terry traveled to a neighboring state to investigate the purchase of two hardware stores. His expenses included travel, legal, accounting, and miscellaneous expenses. The total was $52,000. He incurred the expenses in June and July 2015. Under the following circumstances, what can Terry deduct in 2020?

a. Terry was in the hardware store business and did not acquire the two hardware stores.
b. Terry was in the hardware store business and acquired the two hardware stores and began operating them on October 1, 2020.
c. Terry did not acquire the two hardware stores and was not in the hardware store business.
d. Terry acquired the two hardware stores but was not in the hardware store business when he acquired them. Operations began on October 1, 2020.

Answer 1

Terry's ability to deduct the $52,000 in expenses depends on whether he was already in the hardware business, whether he acquired the stores, and the timing of the expenses. If in business and he didn't acquire the stores, the deduction may be limited by amendment periods. If he acquired the stores and began operations in 2020, he can capitalize and deduct these as start-up costs.

Step-by-step explanation:

The deductibility of Terry's expenses for investigating the purchase of two hardware stores depends largely on the context of his situation in the year in which he wants to take the deduction, which is 2020. The general rule for deductibility of these types of expenses is that they must be ordinary and necessary for the business and directly related to the business activity.

Since Terry was already in the hardware store business and did not acquire the stores, the expenses could potentially be deducted as investigative expenses in connection with his existing trade or business. However, since he incurred the expenses in 2015, he may need to amend a prior year's tax return, as the IRS typically allows a three-year window for such amendments, provided the statute of limitations has not expired.

If Terry was in the hardware business, acquired the stores, and began operating them on October 1, 2020, he can capitalize the $52,000 and begin to deduct these costs as part of the start-up expenses. He may be able to deduct a portion of these expenses in 2020 and amortize the remainder over the appropriate period specified by tax laws.

For someone not in the hardware store business and who did not acquire the hardware stores, the expenses cannot be deducted as they are considered personal and not related to an existing trade or business.

If Terry acquired the two hardware stores but was not in the business when he incurred the expenses, the expenses are treated as part of the start-up costs associated with the new business and could be deducted over time, starting with the year the business begins operation, which would be 2020 in this case.

Answer 2

Answer: See explanation

Step-by-step explanation:

a. Terry was in the hardware store business and did not acquire the two hardware stores.

The amount that Terry will deduct in 2020 will be $52000 which is the deduction for all expenses.

b. Terry was in the hardware store business and acquired the two hardware stores and began operating them on October 1, 2020.

In this case, he'll also deduct $52000 which is the deduction for all expenses.

c. Terry did not acquire the two hardware stores and was not in the hardware store business.

None of his expenses will be deducted. The amount it be deducted is 0.