Question

Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2017.

Stanford incurred the following expenses:
Total investigation costs related to the restaurant $43,000
Total investigation costs related to the bakery 52,300
If required, round any division to two decimal places and use in subsequent computation. Round your final answer to the nearest dollar.
What is the maximum amount Stanford can deduct in 2017 for investigation expenses?

Answer 1

$3,251

Step-by-step explanation:

Since Stanford doesn't operate in the restaurant business and doesn't buy the restaurant, he cannot deduct any amount for investigation costs relating to the restaurant.

Stanford doesn't operate in the bakery business but he bought the bakery, so he can deduct up to $5,000 (before amortization) for investigation costs related to the bakery. But those $5,000 are reduced by every dollar he spent over $50,000, so he can only deduct $2,700 [= $5,000 - ($52,300 - $50,000)].

The remaining $49,600 (= $52,300 - $2,700) can be amortized over 180 months, which equals $275.55 per month (= $49,600 / 180 months).

Since he bought the restaurant in November, he can deduct two months: $275.55 per month x 2 months = $551.10 ≈ $551

So his total deduction for investigation expenses is = $2,700 + $551 = $3,251