Question

A local McDonald’s is operated as a franchise (treated as a separate taxable entity from McDonald’s Corporation as a whole). During 2020, the local franchise had $300,000 in cash sales and the following cash expenditures:

Rental cost of restaurant venue ($2,000 per month, starting March. 1, 2020)         $24,000
Franchise fee for 2020 (fully deductible)                                                                 $30,000
Compensation for 2020                                                                                            $53,000
Utilities for 2020                                                                                                        $9,500

In addition to the above, the owner contracted with a supplier to provide all the cleaning supplies for the location over a 12 month period starting on March 1, 2020. The owner paid $6,000 (the total cost for the contract) on April 1, 2020, and the same amount of supplies was brought in from the supplier each month. Finally, the owner paid the McDonald’s Corporation a royalty fee at 6% of store sales for the 2020 year on December 30, 2020.

1. Assuming the local McDonald’s operates on a calendar year-end under the accrual method, what amount of net profit (loss) for the business was included in AGI for 2020?
   

b. Assuming the local McDonald’s operates on a calendar year-end under the cash method, what amount of net profit (loss) for the business was included in AGI for 2020?

Answer 1