Generally speaking, banks CANNOT deduct interest expenses on borrowed funds to purchase tax exempt securities, EXCEPT if:
A) the bank purchases less than $10 million in any one year.
B) the local government issues no more than $10 million of new issues in any one year.
C) the federal government approves the new issues of the local government, up to a limit of $10 million approved.
D) a or b

Question

Quizplus · Accepted Answer

Banks cannot generally deduct interest expenses on borrowed funds used to purchase tax-exempt securities. However, an exception exists if the local government issuing the securities does not issue more than $10 million of new issues in any one year. This exception is designed to support smaller, local government financing by not penalizing banks for purchasing their tax-exempt securities.

Generally Speaking, Banks CANNOT Deduct Interest Expenses on Borrowed Funds