Question

Clyde operates a sole proprietorship using the cash method. This year Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1st of this year through August 31st of next year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

a. $760
b. $600
c. $480
d. $160
e. $360

Answer 1

The answer is: A) $760

Step-by-step explanation:

Clyde can deduct the full amount he paid in insurance ($600) even if the insurance policy begins in July 1 and ends in twelve months.

He can only deduct four months of interest paid to the US Bank (September - October - November - December) which is $160.

To calculate we multiply the total interest paid by one third (four months are one third of a year) = $480 x 0.333 = $160

Finally we add both deductible expenses $600 + $160 = $760