Classification of Deductions, Personal Expense (LO. 3, 6) Tracy and Brenda are equal partners in Crescent Home Furniture, which is organized as an S corporation. For the year, the company reports sales revenue of $340,000 and business expenses of $195,000. Crescent also earns $17,000 in taxable interest and dividend income and $3,700 in tax-exempt interest on its investments. The investment portfolio consists of $34,000 in tax-exempt securities and $140,000 in taxable securities. Not included in the business expenses is $3,600 Crescent paid as investment interest expense. results to As the staff accountant in charge of taxes for Crescent Home Furniture, complete a memo to Judy, the accounting manager, explaining how the company must report Tracy and Brenda. Note: Crescent allocates the investment interest expense fee using total investment income for reporting results. Do not round intermediate calculations. Round your answers to the nearest dollar. Use these values subsequent computations. To: Judy, Accounting Manager RE: Tax reporting for Tracy and Brenda, Crescent Home is organized as an S corporation and as such is considered a conduit entity. The entity concept requires all deduction items to be traced to the tax unit responsible for taxation of the item. Therefore, certain items must be reported separately. These items include: Taxable interest and dividends of $ 17,000 Tax-exempt interest of $ 3,700 Investment expenses of $ And, any nondeductible expenses (see below). Because the investment interest expense relates to both taxable and nontaxable investments, Crescent must allocate this expense between the deductible and nondeductible securities. Based on allocating the investment interest expense fee using total investment income, only $ of the $3,600 investment expense is deductible. The remaining investment expense, , is not deductible. of If Crescent allocates the investment fees based on the fair market value of the securities, the allocation is $ deductible investment interest expense and of nondeductible. Recall that the important point is that Crescent allocate the investment interest expense fee using a reasonable method that is applied on a consistent basis. . As equal partners, Crescent Home Furniture would The ordinary taxable income for the S corporation is $ report to Tracy and Brenda the following: Ordinary income Taxable interest and dividends $ Tax-exempt interest $ Investment expenses Nondeductible expenses These are based on the total investment income method