PG LLC is an accrual method partnership, manufacturing drones. Patty, 75% partner in PG and a cash method taxpayer, lends $100,000 to PG as a working capital loan on January 1, 2018, with interest due at an arms- length rate. PG accrues, and reports on its income statement, $5,000 of interest expense on this loan. PG pays the interest due to Patty on January 2, 2019. On PG LLC's 2018 tax return, it will deduct the $5,000 interest expense.

Question

Quizplus · Accepted Answer

Under the related party rules, PG LLC cannot deduct the interest expense until it is paid, which occurs in 2019.

PG LLC Is an Accrual Method Partnership, Manufacturing Drones