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.

Answer 1

Answer:

$7,920 for rent on the equipment

$16,800 for rent on the commercial real estate

Explanation:

Calculation to Determine the tax treatment of the given expenses on their tax return.

First step is to calculate the Start Up Expenditure

Rent for April:

Commercial real estate $2,100

Equipment $990

Advertising during pre-operating phase $900

Staff hiring and training during pre-operating phase 11,500

Start Up Expenditure $15,490

Second step is to calculate the amount capitalized over 180 months

Amount capitalized over 180 months=$15,490 - $5,000 = $10,490

Amount capitalized over 180 months=$10,490 / 180 months

Amount capitalized over 180 months=$58.28 per month

Third step is to calculate the amortization deducted from this year’s tax return

Amortization deducted from this year’s tax return=(April – December = 8 months) ($58.28 x 8 months

Amortization deducted from this year’s tax return = $466.24

Now let Determine the tax treatment of the given expenses on their tax return

They can deduct ($990 x 8 months)$7,920 for rent on the equipment from May-December*

They can deduct ($2,100 x 8 months)$16,800 for rent on the commercial real estate fromMay-December