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    Arrow Inc: Business expenditures deductible or nondeductible

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    Which of the following trade or business expenditures of Arrow Inc.
    are deductible on its current year tax return? If an expenditure is
    not deductible, explain why it is not a valid deduction

    Salaries and wages to employees $400,000
    Purchase of new office building $250,000
    Payment of illegal parking fines of president $1,400
    Payment of wedding expenses for President's
    daughter's wedding $16,000
    Entertainment, expenses related to company business $25,000
    Interest on money borrowed to buy tax-exempt securities $9,000

    Total Expenditures $700,400

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    Solution Preview

    Salaries and wages of bona fide employees are always a deductible business expense.

    Purchase of new office building is not a current deduction, but can be depreciated over the life of the building. Under MACRS, a commercial building uses a 39 year life. The current year depreciation is deductible. As to the amount of depreciation, there is a method that allows for buildings to be subdivided into component parts that may allow for certain parts to use a useful live of something less than 39 years. It is called a cost segregation study. Land, of course, is not deductible, and is segregated from the building.

    Payment of illegal parking fines of the President is not deductible. The reasoning is that ...

    Solution Summary

    The detailed solution explains whether each of the items are tax deductible including reasons why some of the expenses are not allowable.