Your brother's business obtained a 30-year amortized mortgage loan for $125,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for Year 1?

Question

Quizplus · Accepted Answer

To calculate the interest tax deduction for Year 1, we need to first calculate the monthly payment:

PMT = (P*r)/(1-(1+r)^(-n))
where P = loan amount = $125,000
r = nominal annual rate/12 = 7%/12 = 0.00583
n = number of payments = 360

PMT = ($125,000*0.00583)/(1-(1+0.00583)^(-360)) = $838.84

Next, we need to calculate the total interest paid in Year 1. For this, we can use an amortization table or a financial calculator. Using an online calculator, we find that the total interest paid in Year 1 is $8,709.78.

Finally, we can deduct this amount from the firm's taxable income for Year 1, assuming it is eligible for the interest deduction. So, the interest tax deduction for Year 1 is $8,709.78. Therefore, the best choice is C.

Your Brother's Business Obtained a 30-Year Amortized Mortgage Loan for $125,000