Question

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 $95.5 million and incurred total expenses of $88.6 million. Her expenses included cost of goods sold of $48.5 million, sales commissions paid of $16.9 million, $10.5 million of interest paid on the building mortgage, and $12.7 million of depreciation.

a. What is Renee’s adjusted taxable income for purposes of calculating the limitation on business interest expense? (Do not round intermediate calculations. Enter your answer in millions of dollar rounded to 1 decimal place.)

b. What is the maximum amount of business interest expense that Renee can deduct this year? (Do not round intermediate calculations. Enter your answer in millions of dollar rounded to 2 decimal place.)

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? (Do not round intermediate calculations. Enter your answer in millions of dollar rounded to 2 decimal place.)

Answer 1

ANSWER:-

a) Renee’s adjusted taxable income for purposes of calculating the limitation on business interest expense.

Particulars	Amount in millions
Taxable Income Before Interest	$95.5
Total Expenses	($88.6)
Gross Income	$6.9
Depreciation	$12.7
Net Interest Expense	$10.5
Adjusted Taxable Income	$30.1

b)The maximum amount of business interest expense that Renee can deduct this year would be.

Particulars	Amount in million
Taxable Income Before Interest	$95.5
Less: Total Expenses	($88.6)
Gross Income	$6.9
Add: Depreciation	$12.7
Add: Net Interest Expense	$10.5
Adjusted Taxable Income	$30.1
Interest Deductible @30% of 30.1	$9.03

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?

Computation of Renee's adjusted taxable income when Renee's revenue include $5 million of business interest income

Here adjusted taxable income would be reduced by interest income and deduction limit of interest would be increased by the interest income

Particulars	Amount in Million
Adjusted Taxable Income [ see answer a]	$30.1
Less: interest income	$5
Adjusted Taxable Income	$25.1

Now, interest deduction limit = 30% of ATI

= $5+30% * $25.1

=$5+$7.53

=$12.53 million.

Hence, Renee can deduct maximum amount of business interest expense = $12.53 million