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 $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?

Answer 1

The maximum amount of business interest expense that can be deducted this year under the business interest limitation for Renee's proprietorship can be calculated by using the business interest expense limitation rule. This rule limits the deductibility of business interest expense to 30% of the adjusted taxable income of the business.

Step-by-step explanation:

The maximum amount of business interest expense that could be deducted this year under the business interest limitation can be calculated by using the business interest expense limitation rule. According to this rule, deductibility of business interest expense is limited to 30% of the adjusted taxable income of the business. The adjusted taxable income is the taxable income of the business with certain adjustments, including adding back the business interest expense, depreciation, and amortization. In this case, to determine the maximum business interest expense deduction, we need to calculate the adjusted taxable income of Renee's proprietorship.

Step 1: Calculate Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

EBITDA = Revenue - Cost of Goods Sold (COGS) - Sales Commissions Paid - Depreciation

EBITDA = $85 million - $48.5 million - $6.4 million - $12.7 million = $17.4 million

Step 2: Calculate Adjusted Taxable Income

Adjusted Taxable Income = EBITDA + Business Interest Income - Business Interest Expense

Adjusted Taxable Income = $17.4 million + $5 million - Business Interest Expense

Step 3: Calculate Maximum Business Interest Expense Deduction

Maximum Business Interest Expense Deduction = 30% of Adjusted Taxable Income

Max Business Interest Expense Deduction = 0.3 * Adjusted Taxable Income

Now that we have calculated the EBITDA and can determine the maximum business interest expense deduction for Renee's proprietorship.

Answer 2

Computation of Interest deductible are as follows

Taxable Income before Interest 85.00

(78.10)

(a) 6.90

(+) Deprecition (b) 12.7

(+) Net Interst Expense (c) 10.5

Adjusted Taxable Income 30.10

(a+b+c)

Interest deductible @30% of ATI 9.03

If revenue Include 5 million of Interest income

Taxable Income Before Interest limitation (a) 6.9

(+) Net Interst Expense (10.5-5) (b) 5.5

(+) Deprecition (c) 12.7

Adjusted Taxable Income 25.1

(a+b+c)

Interest dedutible @30% of ATI 7.53

Max Interest Allowable (Lower of 7.53 or 5.5) 5.5