James and Kate Sawyer were married on New Years Eve of 2019. Before their marriage, Kate lived in New York and worked as a hair stylist for one of the citys top salons. James lives in Atlanta, where he works for a public accounting firm earning an annual salary of $108,000. After their marriage, Kate left her job in New York and moved into the couples newly purchased, 3,200-square-foot home in Atlanta. Kate incurred $3,000 of moving expenses. The couple purchased the home on January 3, 2020, by paying $100,000 down and obtaining a $400,000 mortgage for the remainder. The interest rate on this loan was 7 percent, and the Sawyers made interest-only payments on the loan through December 31, 2020 (assume they paid exactly one years worth of interest on this loan by December 31). On July 1, 2020, the Sawyers borrowed an additional $50,000, secured by the home, in order to make home improvements (the loan was called a home equity loan by the lender). The interest rate on the loan was 7 percent (assume they paid exactly one-half of a years worth of interest on this loan by year-end).

Shortly after moving into the new home, Kate started a new business called Kates Beauty Cuts LLC. She set up shop in a 384-square-foot corner room of the couples home and began to get it ready for business. The room conveniently had a door to the outside, providing customers direct access to the shop. Kate paid $2,420 to have the carpet replaced with a tile floor. She also paid $1,360 to have the room painted with vibrant colors and $810 to have the room rewired for appropriate lighting. Kate ran an ad in the local newspaper and officially opened her shop on January 24, 2020. By the end of the year, Kates Beauty Cuts LLC generated $43,200 of net income before considering the home office deduction. The Sawyers incurred the following home-related expenditures during 2020:

• $5,000 of real property taxes.
• $2,400 for homeowners insurance.
• $3,200 for electricity.
• $2,300 for gas and other utilities.

They determined depreciation expense for their entire house was $17,840. Also, on March 2, Kate was able to finally sell her one-bedroom Manhattan condominium for $486,000. She purchased the condo, which she had lived in for six years prior to her marriage, for $221,000. Kate owns a vacation home in Myrtle Beach, South Carolina. She purchased the home several years ago, largely as an investment. To help cover the expenses of maintaining the home, James and Kate decided to rent the home out. They rented the home for a total of 106 days at fair market value (this included eight days that they rented the home to Jamess brother Jack). In addition to the 106 days, Kate allowed a good friend and customer, Clair, to stay in the home for half-price for two days. James and Kate stayed in the home for six days for a romantic getaway and another three days in order to do some repair and maintenance work on the home. The rental revenues from the home in 2020 were $18,560. The Sawyers incurred the following expenses associated with the home.

• $9,260 of interest (assume not limited by acquisition debt limit).
• $3,560 of real property taxes.
• $2,060 for homeowners insurance.
• $1,360 for electricity.
• $1,760 for gas, other utilities, and landscaping.
• $5,600 for depreciation.

Required:

Determine the Sawyers taxable income for 2020. Disregard self-employment taxes and the qualified business income deduction. Assume the couple paid $4,560 in state income taxes and files a joint return. For determining deductible home office expenses and allocating expenses to the rental, the Sawyers would like to use the methods that minimize their overall taxable income for the year.