Question

George operates a business that generated revenues from services of $50 million in 2019 and reported deductible expenses other than interest of $49 million in 2019, which included depreciation expense of $500,000. The business paid interest expenses of $800,000 in 2019, none of which was for loans used to purchase tax-exempt investments. What is the maximum business interest deduction that George will be eligible to claim this year

Answer 1

Answer:

$750,000

Explanation:

The Adjustable Taxable Income will be calculated first to compute the maximum business interest deduction that is allowable to George.

Step 1. Calculate Net Adjustable Taxable Income

Net Adjustable Taxable Income = Total revenue - Deductible expenses + Disallowed Expenses - Tax Exempt Revenue

Here

Total revenue is $50 million

Deductible expenses are $49 million

Disallowed Expenses includes a depreciation of $0.5 million

Tax Exempt Revenue is zero

So by putting values, we have:

Net Adjustable Taxable Income = $50 million - $49 million + $0.5 million

= $1.5 million

Net ATI = $1.5 million

Step 2. Calculate the maximum business interest deduction which is 50% of Net ATI

Maximum Business Interest Deduction = Net ATI * 50%

= $1.5 * 50% = $0.75 million

So Maximum Business Interest Deduction is $750,000.