1. They open a bagel shop in the city?

Because they are investigating the expansion of an existing business, they may deduct the $25,000 as a current expense.  The investigation is considered to be an ordinary and necessary business expense.

1. They decide not to open a bagel shop in the city?

The $25,000 is deductible even if they don’t open a business in the new location.  The expenses are related to expanding the existing active business, which is an ordinary and necessary business activity.

1. Answer a and b assuming they are investigating opening a computer store in the city and they operate a bagel shop in the suburbs.

A taxpayer who incurs less than $50,000 of start-up costs can deduct up to $5,000 of the start-up costs in the year the new business. Any amount in excess of $5,000 must be amortized over 180 months.  For taxpayers, with start-up costs in excess of $50,000, the $5,000 amount is phased-out on a dollar-by-dollar basis.  Therefore, the deduction for start-up costs can be viewed as consisting of two parts.  The first is a $5,000 current deduction and a second part that amortizes the remaining start-up costs over 180 months.

Because they are investigating a “new” business, the $25,000 is a capital expenditure and is not currently deductible.  If they open the computer store, they can deduct $5,000 and amortize the remaining $20,000 ($25,000  –  $5,000) over 180 months [i.e., ($20,000 ÷ 180 = $111.11) per month].  Therefore, assuming the restaurant is open for 6 months, her deduction in the current year would be $5,667 [$5,000  +  (6  x  $111.11)].

If they do not open the computer store, the investigation expenses are nondeductible personal expenditures.  That is, they have no trade or business to write the expenses against and there is no personal deduction allowed for such expenses