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

Question

Quizplus · Accepted Answer

$160 + $600 = $760. The interest can only be deducted ratably so only 4 months is deductible this year [($480 ÷ 12) × 4 months = $160] but all of the insurance can be deducted under the 12-month rule.

Clyde Operates a Sole Proprietorship Using the Cash Method