1. Philip, 27, is a single self-employed plumbing contractor. During the year, he earns gross revenues of $49,000 and incurs $6,000 of business expenses. His itemized deductions for the year are $7,000. Determine Philip's taxable income and his total tax liability (Self-employment and regular tax.)

On problems 2 & 3 Explain how much of each expenditure is deductible and any limitations that may be placed on the amount of the deduction. If you determine an amount is not deductible, explain why it isn't.

2. Woodrow is President and CEO of ISPEP, a closely held corporation with assets of $20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin daughters who have just completed their freshman year at Aztec State to work in the promotions department of the company. His daughters will be paid $5,000 each for the summer. Other college students who are hired for the summer to perform similar tasks will be paid $4,000.

3. Harry owns Circus City Condiments, a wholesaler of circus food. In 2011 he loaned his friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna used the loan to open a beauty salon. In December 2014, Joanna tells Harry that she has filed for bankruptcy and that he will be lucky to get $2,000 of his money back. The bankruptcy proceedings had not been completed at the end of the year. 

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