Using the Tests for Deductibility Discussed in Chapter 5, Explain

question 104

Essay

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year.
a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000.
b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection.
c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour.
d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.

---

Definitions:

Beta

A unit of measurement for the swings, or integral risk, experienced by a security or portfolio in relation to the wider market.

Common Stock

An equity investment representing ownership in a company, entitling holders to vote at shareholder meetings and receive dividends.

Weighted Average Cost

A method of calculating the total cost of goods sold or assets that weighs each item's cost proportionately.

Face Value

The original value or principal amount of a security as stated by the issuer.