Although Adam Taylor and his best friend Susan Smith both studied engineering at school, they ended up pursuing careers in professional cake decorating. Their company, Sweets, specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. Adam and Susan formed the business at the beginning of 2020 and each contributed $60,000 in exchange for a 50 percent ownership interest. Sweets also borrowed $250,000 from a local bank. Both Adams and Susan had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to Sweets 2020 activities.

Sweets uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.

Sweets received $500,000 of sales revenue and reported $200,000 of cost of goods sold (it did not have any ending inventory).

Sweets paid $50,000 compensation to Adam, $50,000 compensation to Susan, and $50,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).

Sweets paid $25,000 of rent for a building and equipment, $10,000 for advertising, $15,000 in interest expense, $5,000 for utilities, and $5,000 for supplies.

Sweets contributed $10,000 to charity.

Sweets received a $2,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $3,000 in short-term capital gain when it sold some of the stock.

On December 1, 2021, Sweets distributed $30,000 to Adam and $30,000 to Susan.

Sweets has qualified property of $400,000 (unadjusted basis).