Norma formed Hyacinth Enterprises, a proprietorship, in 2011. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2011?
A) Increases Norma's taxable income by $75,000.
B) Increases Norma's taxable income by $160,000.
C) Increases Norma's taxable income by $150,000 ($160,000 ordinary business income - $10,000 long-term capital loss).
D) Increases Norma's taxable income by $157,000 ($160,000 ordinary business income - $3,000 long-term capital loss).
E) None of the above.

Question

Quizplus · Accepted Answer

Norma's taxable income increases by $157,000, which is the ordinary business income of $160,000 ($400,000 operating income - $240,000 operating expenses) minus the deductible portion of the long-term capital loss, which is limited to $3,000. The withdrawal of $75,000 does not affect taxable income.

Norma Formed Hyacinth Enterprises, a Proprietorship, in 2011