Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. $\begin{array}{lc}
\text { Rent on commercial space } & \$ 4,800 \
\text { Utilities } & 735 \
\text { Staff hiring and training } & 3,920 \
\text { Newspaper advertising } & 960 \
&\$ 10,415
\end{array}$
Which of the following statements is true?
A) If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs.
B) If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment.
C) If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures.
D) None of these choices are true.

Question

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. $\begin{array}{lc}
\text { Rent on commercial space } & \$ 4,800 \
\text { Utilities } & 735 \
\text { Staff hiring and training } & 3,920 \
\text { Newspaper advertising } & 960 \
&\$ 10,415
\end{array}$
 Which of the following statements is true?
A) If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs.
B) If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment.
C) If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures.
D) None of these choices are true.

Quizplus · Accepted Answer

BA) If Vane already operates seven other health and fitness centers, the $10,415 preoperating expenditures of the eighth center can be considered as expansion costs and thus deductible. This is because the IRS allows businesses to deduct expenses that are ordinary and necessary for the operation of their business, and expanding an existing business operation can fall under this category.B) As a cash basis taxpayer, Vane can deduct expenses in the year they are paid. This means the $10,415 in preoperating expenditures can be deducted in the year they were paid, assuming they meet the IRS criteria for deductible business expenses.

Vane Company, a Calendar Year Taxpayer, Incurred the Following Expenditures