Business Investigation Expenditures. During January and February of the current year, Big Bang LLC incurs $3,000 in travel, feasibility studies, and legal expenses to investigate the feasibility of opening a new entertainment gallery in one of the new suburban malls in town. Big Bang already owns two other entertainment galleries in other malls in town.
a. what is the proper tax treatment of these expenses if Big Bang decides not to open the next gallery?
b. what is the proper tax treatment of these expenses if Big Bang decides to open the new gallery?
a. If Big Bang LLC decides not to open the new gallery, the proper tax treatment of these expenses would be classified as "investigation expenses" and deducted as ordinary business expenses on their tax return. These expenses would be considered ordinary and necessary in the course of the existing business, even though the decision was made not to proceed with the new gallery.
b. If Big Bang LLC decides to open the new gallery, the proper tax treatment of these expenses would be capitalized. This means that the expenses would be added to the cost basis of the new gallery and depreciated over its useful life. Capitalizing the expenses would allow Big Bang LLC to recover the costs gradually over time, rather than deducting them all at once.
a. If Big Bang LLC decides not to open the new gallery, the business investigation expenditures would be treated as deductible expenses for tax purposes. These expenses fall under the category of startup or organizational costs. According to the Internal Revenue Service (IRS), these expenses can be deducted up to $5,000 in the year in which the business started, with a phase-out threshold of $50,000. Any amount over $5,000 is amortized over a period of 180 months (starting from the month the business started) or 15 years.
b. If Big Bang LLC decides to open the new gallery, the business investigation expenditures would still be treated as deductible expenses. However, instead of being categorized as startup or organizational costs, they would be considered part of the cost of acquiring or creating the business's assets. These expenses are then capitalized and recovered through depreciation or amortization over the useful life of the asset, in this case, the new gallery. The specific depreciation or amortization rules would depend on the type of assets acquired or created.
a. If Big Bang LLC decides not to open the new entertainment gallery, the proper tax treatment of the investigation expenses would be to deduct them as ordinary and necessary business expenses. These expenses fall under Section 162 of the Internal Revenue Code, which allows businesses to deduct expenses incurred in carrying on a trade or business.
b. If Big Bang LLC decides to proceed and open the new entertainment gallery, the proper tax treatment of the investigation expenses would be to capitalize and amortize them over the useful life of the new facility. These expenses are considered startup costs under Section 195 of the Internal Revenue Code.
To determine the tax treatment, the following steps should be followed:
1. Determine the decision: Whether Big Bang LLC decides to open the new gallery or not.
2. If the decision is not to open: The expenses incurred on travel, feasibility studies, and legal expenses can be deducted as ordinary and necessary expenses on the current year's tax return.
3. If the decision is to open: The expenses incurred are considered startup costs and should be capitalized and amortized over the useful life of the new facility. The amortization period begins in the month the business begins. The deduction can be spread over 180 months (15 years) starting from the month when the gallery opens.
It's important to consult with a tax professional or accountant to ensure compliance with all applicable tax laws and regulations.