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, 2020.

Stanford incurred the following expenses:

Total investigation costs related to the restaurant $47,000 Total investigation costs related to the bakery 53,400

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 2020 for investigation expenses?
$

Answer 1

Based on the information available in the question, we can answer as follows:-

Since Stanford does not acquire the restaurant , he would not be eligible to deduct $47,000 during the year.

Further , he cannot deduct the entire $53,400 related to the investigation of costs related to the bakery since he is not involved in the respective trade or business already. IRS allows the taxpayer to deduct upto $5,000 per year as part of the amortization of Startup costs. However, this $5,000 is reduced dollar by dollar for amounts spent exceeding $50,000. The amount not deducted however can be amortized for a period of 180 months.

The deduction is calculated as follows :-

$53,4000 Investigation costs - $50,000 = $3,400

$3,400 is phased out from the maximum deductible amount of $5,000 = $1,600 is eligible for deduction

The remaining amount is amortized over 180 months :-

($53,400 - $1,600)/180 months = $287.78 per month

=$287.78 per month * 2 months during 2020

=$575.55

Maximum Stanford can deduct in 2020 = $575.55 + $1600

Maximum amount that can be deducted = $2,175.55

Maximum amount that can be deducted = $2,176(Rounded)