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Mazyrski [523]
3 years ago
7

Tonya contributes $150,000 to Swan, Inc., for 80% of the stock. In addition, she loans Swan $600,000. The maturity date on the l

oan is five years and the interest rate is 3%, the same as the Federal rate. Which of the following statements are correct?a. If the loan is not reclassified as equity, Swan can deduct interest expense annually of $18,000, and Tonya includes in gross income annually interest income of $18,000.
b. If the loan is reclassified as equity, Swan claims no interest deduction, and Tonya recognizes no income.
c. If the loan is reclassified as equity, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000).
d. Only "If the loan is reclassified as equity, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000)" and "If the loan is not reclassified as equity, Swan can deduct interest expense annually of $18,000, and Tonya includes in gross income annually interest income of $18,000".
e. "If the loan is reclassified as equity, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000)", "If the loan is notreclassified as equity, Swan can deduct interest expense annually of $18,000, and Tonya includes in gross income annually interest income of $18,000", and "If the loan is reclassified as equity, Swan claims no interest deduction, and Tonya recognizes no income".
Business
1 answer:
USPshnik [31]3 years ago
8 0

Answer:

A. If the loan is not reclassified as equity, Swan can deduct interest expense annually of $18,000, and Tonya includes in gross income annually interest income of $18,000.

Explanation:

Loans received under $385 should not be reclassified as equity.

Interest expense is determined by multiplication of the money Tonya loans Swan multiplied by the interest rate.

Therefore,

Interest expenses = 600000 x 3%

                              = $18000

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