Question

LO.5 Malcolm owns 60% and Buddy owns 40% of Magpie Corporation. On July 1, 2017, each lends the corporation $30,000 at an annual interest rate of 5%. Malcolm and Buddy are not related. Both shareholders use the cash method of accounting, and Magpie Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2018, Magpie repays the loans of $60,000 together with the specified interest of $3,000 A. How much of the interest can Magpie Corp. deduct in 2017? In 2018? Show calculations below: Malcom portion of interest in 2017 and 2018: Buddy portion of the tax in 2017 and 2018: Total interest expense in 2017 and 2018: B. When is the interest included in Malcolm and Buddy's gross income in 2017 and 2018? Malcome interst income in 2017 and 2018: Buddy interest income in 2017 and 2018: Total interest expense in 2017 and 2018:

Answer 1

A.	How much of the interest can Magpie Corp. deduct in 2017? In 2018? Show calculations below:
					2017	2018
	Malcom portion of interest				$               -	$        3,000
	Buddy portion of the Interest				$        1,500	$        1,500
	Total interest expense				$        1,500	$        4,500
	Malcom portion of interest is not deductible in 2017, since he is a related partyn holding more
	than 50% of corporation, instead its, deductible in 2018, when its actually paid, Under § 267.
					2017	2018
B.	Malcome interest income				$               -	$        3,000
	Buddy interest income				$               -	$        3,000
	Total interest expense				$               -	$        6,000
	Since both are cash basis taxpayers and income is received in 2016 only, so no recognition of
	income in 2017 and fully recognised in 2018 when actually received.