Question

On November 1 of year 0, Jaxon borrowed $34,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $3,060 relating to the 12-month period from November of year 0 through October of year 1 How much interest, if any, can Jaxon deduct in year 0 if his business uses the cash method of accounting for tax purposes?

Answer 1

The interest deductible in year 0 is $510

Step-by-step explanation:

The loan was taken on 1 November of year 0, which implies that the loan was contracted two months to the end of the year,under cash basis of accounting the interest paid in a yer relating to that year is tax deductible in the same year.

Jaxon paid interest on the loan in December ,hence interest was paid in cash in year 0, but only 2 months of interest paid (November and December interest) belongs to that year,hence interest deductible in year 0 is calculatd as follows:

interest deductible=$3,060*2/12

=$510