During January and February of the current year, Big Shot LLC incurs $39,200 in

Question

During January and February of the current year, Big Shot LLC incurs $39,200 in travel, feasibility studies, and legal expenses to investigate the feasbility of opening a new entertainment gallery in one of the new suburban mils in town. Big Shot LLC does not own any other entertainment galleries and it does not own anything similar at the current time. Assume that the year is 2017 Read the requirements Requirement a. What is the proper tax treatment of these expenses if Big Shot does not open the new galery? If Big Shot does not open the new gallery, they (Enler a "o if the curent year deduction is zero.) Big Shot's total current year deduction in this scenario will be S - Requirement b. What is the proper tax treatment of these expenses if Big Shot decikdes to open the new gallery on August 1 of the current year and makes the appropriate election under Sec. 1952 it Big Shot decidos to open the new gallery on August 1 of the current year,they Big Shot's total current year deduction in this scenario will be

Explanation / Answer

Requirement A

Expenditure incurred in the course of operations that are outside a taxpayer’s normal business operations cannot meet the nexus requirement, hence in these scenario these expenses are not deductable.

Requirement B

Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures. (b) Election to deduct.

(1) Allowance of deduction. If a taxpayer elects the application of this subsection with respect to any start-up expenditures—

(A)the taxpayer shall be allowed a deduction for the taxable year in which the active trade or business begins in an amount equal to the lesser of—

(i) the amount of start-up expenditures with respect to the active trade or business, or (ii) $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $ 50,000, and (B) the remainder of such start-up expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins.   

Hence Big Shot LLC will be able to deduct $ 5,000 expenses in current year, and amortize the remaining $ 34,800 over 180 Months begining of August.

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