Clay incurs $5,000 of investment interest expense related to purchasing Renco Company stock and New Orleans municipal bonds. He receives $6,000 of dividends on the stock and $14,000 of interest on the bonds. The amount of investment interest expense Clay can deduct is:
A)$- 0 -
B)$1,500
C)$2,500
D)$3,500
E)$5,000

Question

Quizplus · Accepted Answer

Clay can deduct $2,500 of investment interest expense. The amount of investment interest expense that can be deducted is limited to the amount of net investment income. Net investment income is the amount of investment income minus investment expenses. In this case, Clay's net investment income is $21,000 ($6,000 + $14,000 - $5,000). Therefore, Clay can deduct $2,500 of investment interest expense.

Clay Incurs $5,000 of Investment Interest Expense Related to Purchasing