Question

4. Disinterested Corporation is a C Corporation but is not a car dealer. In 2018 it has taxable income of $500,000 which includes taxable interest income of $25,000. The corporation did not own any municipal bonds. It has otherwise deductible interest expense for the year of $200,000, depreciation expense of 25,000 and amortization expense of $22,000 all of which were subtracted in arriving at the $500,000 taxable income figure. For the last three years the corporation had gross receipts exceeding $30 million in each year. Assume the corporation makes no elections as to the deductibility of interest expense. a. Show the calculation of how much interest expense the corporation could deduct for the current year. b. If the taxable income of the year were $300,000 rather than $500,000 and all other facts remained the same how much interest expense could the corporation deduct for the year? c. What if anything happens to any interest expense that could be deducted? d. If Disinterested was in the real estate business how if at all might the answers change? e. If Disinterested's gross receipts did not exceed $20,000 million in any of the last three years how if at all might the answer change?

Answer 1

Rule:. If the business has average gross receipts $25 million or more, then deductible interest expense is capped 30% of companies earnings before interest, taxes, depreciation and ammortisation.

Therefore,

a) 30% of earnings before interest, tax, depreciation and ammortisation

30%(500000+200000+25000+22000)

=. 224100

Hence, total 200000 can be deducted

b) 30%. ( 30000+200000+25000+22000)

=. 164100

Hence, maximum of 164100 can be deducted as interest expense

C) same as given in rule

D) Interest expense related to your business or rental is deductible. There is no “floor,” as with investment interest expense. It is not limited to the amount of net income you have from the business. The loan can be a secured or unsecured loan as well as a business credit card.

Hence, total amount of 2 lakks can be deducted.

E) if the receipts doesn't exceed the 30 million, there is no cap on the deductible amount.