Question

Mr. and Mrs. FB, a retired couple, decided to open a family restaurant. During March and April, they incurred the following expenses:

 

Prepaid rent on commercial real estate ($2,100 per month from April through December)	$	18,900
Prepaid rent on restaurant equipment ($990 per month from April through December)		8,910
Advertising of upcoming grand opening		900
Staff hiring and training		11,500
	$	40,210

Mr. and Mrs. FB served their first meal to a customer on May 1. Determine the tax treatment of the given expenses on their tax return. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

Answer 1

Amortization:

Assets that we cannot see or touch but have monetary value are known as intangible assets. Examples include copyright or trademark or organization cost or startup cost or leasehold cost and improvement or acquisition of commercial intangible for business purpose.

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Such intangible assets cost is recovered by way of amortization methods specified by Internal Revenue Services.

Start-Up Cost:

Start-Up expenses include any upfront cost which are required to setup business or day to day operational expenses incurred.

Tax Treatment of Start-Up Cost:

Any newly created start-up as per tax law is allowed to deduct lower cost of any start-up expenses incurred or $5,000. The deduction of $5,000 is maximum allowed for start-up cost up to $50,000.

If a new start-up has any expenses that are non to be deducted it may capitalize such cost by electing in as amortization cost spread out in 180 months in which the start-up begins its operation.

Calculation of Mr. and Mrs. FB Start-Up Expenses is as follows below:

The formulas used in the calculation are as follows:

The value obtained are as follows:

Based on above calculations Mr. and Mrs. FB Total Start Up Expenses is $ 15,490 for their restaurant.

As per tax treatment of start-up expenses, Both Mr. and Mrs. FB can deduct $5,000 out of incurred expenses of $15,490 in current year.

Any remaining non - deductible expense of $11,300 .Both could elect in as capitalized cost for 180 months for $10,490.

Therefore over 180 months, Mr. A and Mrs. FB’s Capitalized cost is calculated as follows below:

Given both of them begin their restaurant operation from July he may amortize for 6 months as calculated below.

Mr. A and Mrs. FB Start-Up Cost is and .

Therefore,

Conclusion-

Start-Up cost are allowed a deduction of maximum $5,000 out of incurred expenses within $50,000 and any non-deductible expenses in current year will be capitalized by electing in as amortization for a period of 180 months or from start-up operational month to year end.

Answer 2

Mr. and Mrs. FB have $15,490 start-up expenditures.

Rent for April:

Commercial real estate $2,100

Equipment 990

Advertising during preoperating phase 900

Staff hiring and training during preoperating phase   11,500

  $15,490

They can deduct $5,000 of these expenditures and must capitalize the $10,490 remainder. They can elect to amortize the capitalized cost over 180 months at the rate of $58.28 per month. If they make the election, they can deduct $466 amortization (8 months × $58.28) on their current year's tax return.

Mr. and Mrs. FB can deduct the $24,720 rent on the commercial real estate and restaurant equipment for May through December. Thus, the total current deduction is $30,186 = $5,000 + $466 + $24,720.