1. Red Company is a proprietorship owned by Sally, a single individual. Red manu
ID: 2565770 • Letter: 1
Question
1. Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. An examination of Red’s records shows the following items for the current year:
Domestic production gross receipts 2,500,000
Cost of goods sold for domestic products 600,000
Expenses directly related to domestic production gross receipts (other than wages) 280,000
Ratable portion of other expenses 100,000
Other expenses not allocated to domestic production gross receipts 30,000
W-2 wages paid to employees engaged in qualified domestic production activities 270,000
Total W-2 wages 320,000
Sally also had the following additional items:
Dividends received 20,000
Interest income 10,000
Determine Sally’s domestic production activities deduction for the current year.
Explanation / Answer
SOLUTION
Sally's domestic production activities deduction = $108,000
Lesser of: QPAI * 9% ($1,250,000) = $112,500
Modified AGI * 9% ($1,200,000) = $108,000
Not to exceed 50% * $270,000 = $135,000
Sally's domestic production activities deduction = $108,000
Amount ($) Gross receipts 2,500,000 Less: Cost of goods sold (600,000) Expenses directly related (280,000) Other allocated and nonallocated expenses ($100,000 + $30,000) (130,000) Wages (320,000) Dividends received 20,000 Interest received 10,000 Modified adjusted gross income 1,200,000 Domestic production gross receipts 2,500,000 Less: Cost of goods sold (600,000) Direct expenses (280,000) Allocated expenses (100,000) W-2 wages directly related (270,000) Qualified production activities income (QPAI) 1,250,000Related Questions
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