Mr. Roberts has three loans at First National Bank: Loan A made to purchase a car, secured by the car; Loan B made to purchase stock, secured by a lake lot; and Loan C made to pay taxes, secured by a rental house he owns. Last year he paid $2,500 in interest on Loan A; $550 in interest on Loan B; and $1,000 in interest on Loan C. How much interest will First National Bank report to the IRS?
Click on the arrows to vote for the correct answer
A. B. C. D.B
The question relates to the calculation of interest expense to be reported to the IRS. For tax purposes, interest expense paid by an individual or business is often deductible from taxable income, provided the interest is paid on a loan that is used for a qualifying purpose, and the loan is secured by collateral.
In this case, Mr. Roberts has three loans at First National Bank, each secured by a different asset. To calculate the total interest expense to be reported to the IRS, we need to determine which loans qualify for tax deductions based on their purpose and collateral, and then add up the interest paid on those loans.
Loan A is made to purchase a car, secured by the car itself. This loan qualifies for a tax deduction because it is secured by a qualifying asset and is used to purchase a qualifying item. Therefore, the interest paid on Loan A, which is $2,500, is deductible from Mr. Roberts' taxable income.
Loan B is made to purchase stock, secured by a lake lot. Whether this loan qualifies for a tax deduction depends on the purpose for which the stock is purchased. If the stock is purchased for investment purposes, the interest paid on Loan B is deductible as investment interest expense, subject to certain limitations. However, if the stock is purchased for personal use or as inventory for a business, the interest is not deductible. The question does not provide enough information to determine the purpose for which Mr. Roberts purchased the stock, so we cannot determine whether the interest paid on Loan B is deductible.
Loan C is made to pay taxes, secured by a rental house Mr. Roberts owns. This loan does not qualify for a tax deduction because it is not used to purchase a qualifying item. Instead, it is used to pay taxes owed to the government, which is not a deductible expense. Therefore, the interest paid on Loan C, which is $1,000, is not deductible from Mr. Roberts' taxable income.
To sum up, only the interest paid on Loan A is deductible, which is $2,500. Therefore, the total interest expense to be reported to the IRS is $2,500, and the correct answer is (D) $2,500.