home / study / business / accounting / accounting questions andanswers / Carol Is A Single Mother Who Owns A Wholesale Auto PartsDistributorship. The Business Is Organized ... Question: Carol is asingle mother who owns a wholesale auto parts distributorship. Thebusiness is organiz... Carol is a single mother who owns awholesale auto parts distributorship. The business is organized asa sole proprietorship. Her business has advanced, and she can nolonger devote the time necessary to do her own tax return. Becauseshe always has prepared her own return, Carol is familiar with mosttax rules applicable to her business and personal affairs. However,she has come to you for advice with respect to a number of itemsshe paid during the current year. You are to determine whether shecan take a deduction for the expenditures in the current year. A,Carol purchased a small building on March 2 to use as a warehousefor her auto parts inventory. To purchase the building, sheborrowed $180,000 on a 30-year loan and paid $20,000 in additionalcash. Carol also incurred $3,200 in legal and other fees topurchase the building. The bank charged her $3,600 in points(prepaid interest) to obtain the loan. After acquiring thebuilding, Carol spent an additional $25,000 to renovate it for useas a warehouse. The $25,000 included $8,000 for painting. B, Carolhad her office building painted at a cost of $14,000 and paid$6,000 to have it landscaped. She paid for the building renovationin part a and the office building work by borrowing $60,000 onApril 1 at 7% interest. (See part f for details of the interestpayments.) C, On April 1, Carol prepaid a 1-year fire insurancepolicy on her 2 buildings. The policy cost $1,500, and the insurerrequired the prepayment. On September 1, Carol prepaid a $5,000,2-year maintenance contract on the buildings. D, Carol started aself-insured medical reimbursement plan for her employees thisyear. Based on actuarial assumptions, she deposited $13,500 in afund to pay employees’ medical expenses. Actual payments from thefund totaled $11,200. E, Carol purchased a new automobile costing$32,000. She can document that her business use of the automobilecame to 90% and that her out-of-pocket operating costs totaled$3,600. F, Carol paid the following interest on business-relatedloans: Warehouse $15,300 Office building 4,000 Renovation loan5,400 The renovation loan was for $60,000. Because she spent only$45,000 renovating the new building and painting and landscapingthe old one, she used the additional $15,000 to purchase city ofSeattle bonds with a yield of 6%. G, Carol became active inpolitics and contributed $1,000 to the presidential campaign of anindependent candidate. She made the contribution because shebelieved that, if elected, the candidate would institute policiesbeneficial to her business. The candidate lost the election andimmediately started a grassroots lobbying organization. The purposeof the organization is to keep track of elected officials’ campaignpromises and report to the public when they vote contrary to theirstated campaign promises. Carol paid $1,600 in dues to join thelobbying organization. H, Carol’s oldest son began college duringthe current year. She paid his tuition and living expenses, a totalof $13,300, out of the company’s checking account. During thesummer, her son worked for the business, and Carol paid him $4,300,the same amount she paid other college students working during thesummer. Because she consults her son from time to time on theoperation of the business, she thinks that at least some of the$13,300 should be deductible. I, Carol has always itemized herdeductions. This year, her mother and father retired and could nolonger afford the mortgage interest and property taxes on theirhome. Rather than have them sell the house, Carol made the paymentsfor them. They received a statement from their bank indicating thata total of $8,125 in mortgage interest and taxes were paid in thecurrent year. Carol knows that mortgage interest and property taxesare deductible as itemized deductions and would like to add them toher personal interest and property tax payments. J, Because of thesuccess of her business, Carol has received many offers to investin various business ventures. One offer was to establish a chain ofnursing homes in Florida. Carol spent two weeks in Floridaevaluating the prospects of the proposed venture and incurred costsof $2,100. After careful consideration, she decided the venture wastoo risky and decided not to expand into the health-carebusiness.