Davis owns and operates a convenience store on the north side of the city. He has always wanted to operate a sports bar. When he hears of a new shopping center development in the south part of the city, he contacts the developer and begins negotiations to open his dream enterprise.
I.If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new business, he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000.
II.If Davis decides not to open his bar and restaurant, the investigation expenses are fully deductible.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Davis owns and operates a convenience store on the north side of the city. He has always wanted to operate a sports bar. When he hears of a new shopping center development in the south part of the city, he contacts the developer and begins negotiations to open his dream enterprise.
I.If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new business, he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000.
II.If Davis decides not to open his bar and restaurant, the investigation expenses are fully deductible.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Statement I is correct regarding the deduction of start-up costs. According to the IRS, expenses related to investigating a business opportunity, intended to help decide whether to start or acquire a business, are not deductible if the decision is not to go ahead. Therefore, statement II is incorrect.

Davis Owns and Operates a Convenience Store on the North