Neal and Ned spend $25,000 on travel, surveys, and financial forecasts toinvestigate the possibility of opening a bagel shop in the city. Because theirsuburban bagel shop has been so successful, they would like to expand theiroperations. What is the proper treatment of their expenditures if

a. They open a bagel shop in the city?

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

a. The $25,000 is deductible as a current expense.

b. The $25,000 is still deductible as a current expense.

Explanation:

a. They open a bagel shop in the city?

The $25,000 spent on travel, surveys, and financial forecasts will be treated as an an ordinary and necessary business expense. The reason is that it is spent to carry out an investigation necessary for expanding their already existing business. Therefore, the $25,000 is deductible as a current expense.

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

It does not matter whether they open the bagel shop in the city or not. The $25,000 spent on investigation will still be treated as an an ordinary and necessary business expense, since it is spent to expand existing active business. The $25,000 is still deductible as a current expense.