There Are 10 Questions Total13 Lo2 Aubry A Cash Basis And Ca

There Are 10 Questions Total13 Lo2 Aubry A Cash Basis And Calendar

There Are 10 questions total 13. LO.2 Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2014 by buying $65,000 worth of supplies for his business on December 27, 2014. The supplies will be used up in 2015. a. Can Aubry deduct the expenditure for 2014? b. Would your answer in part (a) change if Aubry bought the supplies because the seller was going out of business and offered a large discount on the price? Explain. 23. LO.3 Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1500 for travel, $2000 for legal advice, and $3500 for a market analysis. Based on the different tax consequences listed below, describe the circumstances that were involved in Paul’s investigation of the business. a. Paul deducts the $7000 of expenses. b. Paul cannot deduct any of the $7000 of expenses. c. Paul deducts $5000 of the expenses and amortizes the $2000 balance over a period of 180 months.

Paper For Above instruction

This paper analyzes two core tax-related questions concerning the deductibility of certain expenses under U.S. tax law, specifically focusing on cash basis taxpayers and the treatment of investigative expenses for business acquisition. The first scenario involves Aubry, a cash basis and calendar year taxpayer, and explores the timing and conditions under which business supplies purchased near year-end can be deducted. The second scenario examines Paul’s investigative expenses related to potentially acquiring a new restaurant business, emphasizing the circumstances under which such expenses are deductible, amortized, or non-deductible.

Understanding Aubry’s Deductibility of Supplies

Aubry's situation involves the purchase of $65,000 worth of supplies on December 27, 2014, intended for use in 2015. Under the cash basis method, taxpayers typically deduct expenses in the year they are paid. However, the IRS imposes specific rules for the timing of deductions related to supplies and inventory. Generally, expenses for supplies that are used up in a taxpayer's trade or business during the year are deductible in the year of purchase, regardless of when they are used, provided the supplies are for business purposes and not capital assets (Internal Revenue Service, 2022).

Thus, for Aubry, despite the supplies being used up in 2015, he can generally deduct the expense in 2014 because he purchased them in that year and is a cash basis taxpayer. This is consistent with the IRS's rules that expenses for supplies are deductible in the year of payment, especially when the supplies are intended for immediate use. The reasoning is that the cash basis taxpayer recognizes expenses when paid, and supplies are considered deductible when purchased if they are for immediate use or consumption (Schneider & Hegarty, 2019).

Impact of Seller’s Financial Situation on Deduction

If Aubry purchased the supplies because the seller was going out of business and offered a discount, the core issue is whether this affects the timing or nature of the deduction. Generally, the reason for the purchase does not alter the fundamental tax treatment unless it indicates that the expenditure is capital in nature or relates to a different purpose. The IRS requires that expenses be usual and necessary for the business and paid during the taxable year (IRS, 2022). The fact that a discount is offered due to the seller’s financial situation does not inherently change the deductibility; it might just accelerate the expense recognition if the price is lower, but this is consistent with existing rules for deducting business supplies.

Paul’s Business Investigation Expenses

Paul’s expenses for travel ($1,500), legal advice ($2,000), and market analysis ($3,500) total $7,000. The deductibility of such expenses depends on whether they are considered current operational expenses or capital in nature, and at what stage of business development they are incurred.

- Scenario (a): Deducts $7,000 Expenses

If Paul is actively investigating a potential business acquisition, these expenses are typically considered ordinary and necessary business expenses and are deductible in the year incurred, provided they are not capital expenses or related to a capital transaction (Feldman & Fried, 2021). Under IRS rules, expenses incurred in the course of investigating a new or existing business are deductible if they are directly related to the investigation and not capitalized as part of the cost of the acquired business.

- Scenario (b): Cannot Deduct Any Expenses

If the expenses are considered lobbying, personal, or unrelated to the business investigation, then they are nondeductible. Moreover, if Paul is only considering the acquisition without any definite intention to purchase, or if the expenses are deemed exploratory with no immediate clear purpose, the IRS may classify them as nondeductible preliminary costs (Reich, 2020).

- Scenario (c): Deduct $5,000 and Amortize $2,000

If part of the expenses qualify as startup costs or organizational costs related to establishing the business, then only a portion may be deducted immediately, with the remaining amortized over a specified period (IRS, 2022). For example, legal advice directly related to establishing the business could be capitalized and amortized over 180 months, while travel and market analysis expenses directly related to the investigation may be deducted presently.

Conclusion

In conclusion, Aubry can generally deduct the supplies purchased in 2014 despite their use in 2015, as per cash basis accounting and IRS guidance on supplies. The reason for the discount does not materially change the deductibility. Conversely, Paul’s investigation expenses have nuanced treatment depending on their nature and purpose, with the possibility of immediate deduction, partial deduction, or capitalization/amortization based on IRS rules governing business start-up and investigation expenses. Proper classification and timing of deductions are vital for tax compliance and optimizing taxable income reductions.

References

Feldman, S., & Fried, M. (2021). Tax Planning and Compliance for Business Owners. Wiley.

Internal Revenue Service. (2022). Publication 535: Business Expenses. https://www.irs.gov/publications/p535

Reich, B. H. (2020). Tax Strategies for Small Business. CCH understanding taxes.

Schneider, A., & Hegarty, C. (2019). Federal Income Taxation of Business Entities. Wolters Kluwer.

U.S. Department of the Treasury. (2022). IRS Rules on Business Expenses. https://www.irs.gov/businesses/small-businesses-self-employed

Wallace, M., & Johnson, P. (2021). Fundamentals of Taxation. Pearson Education.

Zelenak, L. A. (2020). Business Taxation and Planning. West Academic Publishing.

Kelley, K., & Roberto, B. (2021). Tax Guide for Small Business and Self-Employed Taxpayers. Nolo Press.