Question 1

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year.
a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000.
b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection.
c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour.
d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.

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Question 2

Using the general tests for deductibility, explain why the following expenses are not fully deductible.
a.Irene spends $1,600 on a trip to Florida to investigate opening up a consulting firm. Irene currently works for a consulting firm.
b.Augie and his wife divorce during the current year. Augie pays $3,000 in legal fees related to the divorce.
c.Peter owns a hardware store. During the current year, he pays $328,000 to acquire a new warehouse.
d.Paul contributes $25 to a fund to be used for advertising to persuade voters to vote against a candidate running for Congress.

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Question 3

Wilson owns a condominium in Gatlinburg, Tennessee. During the current year, she incurs the following expenses before allocation related to the property:
?
 $$\begin{array} { l r } 
\text { Mortgage interest } & \$ 10,000 \
\text { Property taxes } & 4,000 \
\text { Utilities } & 1,000 \
\text { Maintenance fees } & 1,300 \
\text { Repairs } & 800 \
\text { Depreciation } & 6,000
\end{array}$$ 
a.For each of the following scenarios indicate whether Wilson would treat the condominium for income tax purposes as personal use property, a rental or a vacation home.?? $$\begin{array} { | l | r | r | r | r | } 
\hline \text { Case } & \text { Rental } & \text { Rental } & \text { Personal } & \text { Personal, rental, } \
&\text { Income } & \text { Days } & \text { Use Days } & \text { or vacation } \
\hline \text { A } & \$ 10,000 & 300 & 0 & \
\hline \text { B } & 7,000 & 60 & 10 & \
\hline \text { C } & 15,000 & 60 & 20 & \
\hline \text { D } & 2,000 & 10 & 40 & \
\hline \text { E } & 11,000 & 280 & 20 \
\hline
\end{array}$$ 
b.Consider Case C. Determine Wilson's deductions related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted.

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Question 4

Cornelius owns a condominium in Orlando. During the year, Cornelius uses the condo a total of 25 days. The condo is also rented to vacationers for a total of 75 days and generates rental income of $9,000. Cornelius incurs the following expenses:
Determine Cornelius's deduction related to the condominium. Indicate the amount of each expense that can be deducted and how it would be deducted.
 $$\begin{array} { l r } 
\text { Mortgage interest } & \$ 4,000 \
\text { Property taxes } & 1,800 \
\text { Utilities } & 2,000 \
\text { Insurance } & 1,200 \
\text { Depreciation } & 10,000
\end{array}$$

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Question 5

The Wilson Corporation incurs the following expenses. Explain whether the following expenses should be capitalized or deducted in the current period.
a.Paid $2,500 to blacktop a gravel parking lot.
b.Paid $1,900 for new tires on the truck.
c.Paid $3,000 for a new fire and security alarm system for the factory.
d.Paid $6,250 to paint the interior and exterior of the office and factory building that it just acquired.
e.Paid $1,200 for a new compressor for the factory's central air conditioning system.

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Question 6

Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.

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Question 7

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year
a.Janet pays $900 in interest on debt she incurred to purchase municipal bonds. The bonds pay $1,500 of interest in the current year.
b.Andrew owns a retail-clothing store. Andrew has the opportunity to obtain a franchise to operate a discount sporting goods store. He spends $5,000 investigating the possibility of opening a sporting goods store in a neighboring town.
c.Jane owns a fitness center. She employs the star basketball player at Local University as an aerobics instructor. Because of his reputation, she pays him $20 an hour. Jane pays her other aerobics instructors $10 an hour.
d.Alvin makes a vacation trip to Florida, and while there spends two days investigating the feasibility of opening up a new office of his optometry practice.

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Quiz 5: Introduction to Business Expenses

Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.