Henrietta, the owner of a very successful hotel chain in the Southeast, is exploring the possibility of expanding the chain into a city in the Northeast. She incurs $32,000 of expenses associated with this investigation. Based on the regulatory environment for hotels in the city, she decides not to expand. During the year, she also investigates opening a restaurant that will be part of a national restaurant chain. Her expenses for this are $51,800. She proceeds with opening the restaurant, and it begins operations on May 1. Required:
Determine the amount that Henrietta can deduct in the current year for investigating these two businesses.

Henrietta

The amount that Henrietta can deduct in the current year for investigating these two businesses is:

= $83,800.

Explanation:

a) Data and Calculations:

Investigation cost for expanding the chain into the Northeast = $32,000

Investigation cost for expanding the chain into another location= $51,800

Total investigation costs = $83,800

b) According to the IRS, for the investigation costs to be deductible, they "must be both ordinary and necessary."  "Ordinary" refers to common or acceptable expense in the Hotel industry, while "necessary" means the expense helps Henrietta's business in its pursuit of earning income (which a business expansion does).  Therefore, the total investigation cost is deductible.