On January 1 of the current year ,Sam borrows 70,000, pledging the assets of of

Question

On January 1 of the current year ,Sam borrows 70,000, pledging the assets of of his business as collateral .he immediately deposits the money in an interest bearing checking account.sam already had $40,000 in this account. On May 1 Sam invests $65,000 in a limited real estate patnership. On August 1, he buys a new ski boat for$ 15,000. On September 1 ,he makes a $19,000 capital contribution to his unincorporated business. Sam repays $30,000 of the loan on November 30 of the current year. Requirement Classify Sam's interest expense for the year.

Explanation / Answer

Answer

Interest are divided into different categories for tax puropses

Interest expense for the year:

1.Jan. 1 to Mar. 31

Investment interest =100% (The total principle is an investment)

2.Apr. 1 to Jun. 30:

A.Passive interest ($65,000/$70,000)=92.86%

B.Investment interest ($5,000/$70,000) =7.14%

3.July 1 to Nov. 30:

Interest expenses is same as: Passive interest 92.86%,Investment interest 7.14%

4.December 1 to december 31:

All interest exp. are classified as passive interest.

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