Paul owns a lumber yard in Portland. He has decided to expand his business interests and is considering opening a golf course in Seattle. He has incurred $51,000 of expenses investigating whether to open the new golf course. In January of the current year he finds the perfect location and opens the golf course on July 1. What amount of the investigation expenses can he deduct in the current year?
A)$- 0 -
B)$5,100
C)$5,567
D)$6,533
E)$51,000

Question

Quizplus · Accepted Answer

Paul can deduct $5,567 of the investigation expenses in the current year.

According to IRS rules, investigation expenses incurred before deciding to enter into a new business or before identifying a specific business location must be treated as capital expenses and cannot be deducted in the current year.

Since Paul incurred $51,000 of investigation expenses before identifying the specific location for the golf course, he cannot deduct those expenses in the current year.

However, the $51,000 of investigation expenses can be amortized over a period of 180 months once the new business is operational. This means that Paul can deduct $284.83 ($51,000/180) of the investigation expenses each month.

Since Paul opened the golf course on July 1st (the 7th month of the year), he can deduct 7 x $284.83 = $1,993.81 of the investigation expenses in the current year.

Therefore, the correct answer is C) $5,567 - $1,993.81 = $3,573.19.

Paul Owns a Lumber Yard in Portland