Question

Kevin forms Kelly Corp. (C corp.) to manufacture and sell machine parts. Kevin obtains loan from “Your kind neighborhood Bank” for $ 1million @ 10%. Kelly Corp’s debt equity ratio is 4:1. For the year ended 12/31/2019, Kevin expects the business to generate NPBIT (Net Profit before Interest and Tax) of $200,000. How much of bank interest is deductible on the tax return of Kelly Corp. for year 2019? Assume no other interest income for the business. Please justify your answer.

Answer 1

Answer:

Kelly Corp. is a C corp.

Bank interest is deductible on the tax return of Kelly Corp. for year 2019 = Loan amount * Interest rate

= $1000000 * 10%

= $100,000

Assume no other interest income for the business, bank interest is deductible on the tax return of Kelly Corp. for year 2019 = $100,000