Question

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

Answer 1

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.