1 answer

Required information [The following information applies to the questions displayed below.] Renee operates a proprietorship selling...

Question:

Required information [The following information applies to the questions displayed below.] Renee operates a proprietorship seRequired information [The following information applies to the questions displayed below.) Renee operates a proprietorship se

Required information [The following information applies to the questions displayed below.] Renee operates a proprietorship selling collectibles over the web, and last year she purchased a building for $24 million for her business. This year, Renee's proprietorship reported revenue of $85 million and incurred total expenses of $78.1 million. Her expenses included cost of goods sold of $48.5 million, sales commissions paid of $6.4 million, $10.5 million of interest paid on the building mortgage, and $12.7 million of depreciation. b. What is the maximum amount of business interest expense that Renee can deduct this year? Deductible Business Interest Expense million million
Required information [The following information applies to the questions displayed below.) Renee operates a proprietorship selling collectibles over the web, and last year she purchased a building for $24 million for her business. This year, Renee's proprietorship reported revenue of $85 million and incurred total expenses of $78.1 million. Her expenses included cost of goods sold of $48.5 million, sales commissions paid of $6.4 million, $10.5 million of interest paid on the building mortgage, and $12.7 million of depreciation. c. Suppose that Renee's revenue includes $5 million of business interest income. What is the maximum amount of business interest expense that could be deducted this year under the business interest limitation? Deductible Business Interest Expense million

Answers

b.

Compute business interest expense as follows:

million
Income before tax 85
Less: total expense -78.1
6.9
Add: depreciation 12.7
Add: net interest expense 10.5
Adjusted taxable income 30.1
Interest (30% * 30.1) 9.03

Thus, business interest expense is 9.03 million.

c.

Compute maximum deduction allowed as follows:

million
Income before interest limitation 6.9
Add: interest expense 5.5
Add: depreciation 12.7
Adjusted taxable income 25.1
Interest (30% * 25.1) 7.53
Maximum deduction allowed 5.5
lower of 7.53 or 5.5)

Thus, maximum deduction allowed of interest is 5.5 million.

.

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