Amy borrowed $25,000 for her business from a local bank two years ago.To increase her deductions for 2016,she pays December interest of $400 and prepays January and February interest totaling $800 on December 30,2016.The maturity date of the note is November 30,2017.How much of the interest that she paid in December is deductible in 2016?
I.If she is a cash-basis taxpayer,Amy's interest deduction is $1,200.
II.If she is an accrual-basis taxpayer,Amy's interest deduction is $400.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Amy borrowed $25,000 for her business from a local bank two years ago.To increase her deductions for 2016,she pays December interest of $400 and prepays January and February interest totaling $800 on December 30,2016.The maturity date of the note is November 30,2017.How much of the interest that she paid in December is deductible in 2016?
I.If she is a cash-basis taxpayer,Amy's interest deduction is $1,200.
II.If she is an accrual-basis taxpayer,Amy's interest deduction is $400.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

If Amy is a cash-basis taxpayer, she can only deduct the interest she paid in 2016, which is $400. However, if she is an accrual-basis taxpayer, she can deduct the interest that was accrued in December ($400) plus the interest that was prepaid for January and February ($800), totaling $1,200. Therefore, statement I is incorrect and statement II is correct.

Amy Borrowed $25,000 for Her Business from a Local Bank