Question

Charles is a single person, age 35, with no dependents. In 2020, Charles has gross income of $75,000 from his sole proprietorship. Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship. He has interest and dividend income of $22,000. Charles has $7,000 of itemized deductions. Charles taxable income is

a) $4,600

b) $10,000

c) $17,000

d) none of the above

Answer 1

Charles taxable income is calculated as follows:-

Particulars	Amount	Amount
Gross Income	75,000
Less:- Deductible business expense	(80,000)
Loss from Sole proprietorship		(5,000)
Add:- Interest and Dividend Income		22,000
Less:- Itemized deductions		(7,000)
Taxable Income		10,000

The correct answer for the question is Option B - $10,000.

Option C and Option D are incorrect per the calculation above.

Per IRS, any losses from Sole proprietorship can be used to set off income from other sources for the taxpayer subject to the maximum of 80% of taxable income. Since $5,000 is lesser than 80% of the taxable income , the entire loss can be deducted for the taxpayer. If incase the taxpayer uses the Standard deduction his taxable income would be Option A - $4,600 as he would be eligible for a standard deduction of $12,400 as against the Itemized deduction of $7,000 in the question.

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