Henry owns a hardware store in Indianapolis. He has decided to expand his business interests and is considering opening a golf store in a neighboring town. He has incurred $12,000 of expenses investigating whether to open the new golf store. In July of the current year he finds the perfect location and opens the golf store on October 1. What amount of the investigation expenses can he deduct in the current year

$5,117

Explanation:

If Henry was investigating to expand his existing business, the full amount of the expenses should be deducted whether he actually opened or not a new hardware store. But since a golf store is not related to a hardware store, then he must capitalize the expenses (not deduct them).

Since the investigation costs were lower than $50,000, Henry can choose to immediately capitalize $5,000. The rest of the expenses must be capitalized over 180 months:

Henry total capitalization = $5,000 + [$7,000 (= $12,000 - $5,000) x 3/180 months (July, August and September)] = $5,000 + $116.67 = $5,116.67 ≈ $5,117 (no cents)