What amount of interest was deductible on Michaels’ 1993 income tax return?

On December 1, 1992, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 1993. Michaels paid the entire interest of $12,000 on December 1, 1992.

What amount of interest was deductible on Michaels’ 1993 income tax return?
A . $12,000
B. $11,000
C. $1,000
D. $0

View Answer

Answer: D

Explanation:

Since Michaels is a cash basis taxpayer, she would deduct the interest expense in the year it was paid. The entire interest amount of $12,000 was paid on December 1, 1992. Therefore, Michaels would have deducted the $12,000 on her 1992 income tax return, not her 1993 return.

Since the interest was already deducted in 1992, there would be no interest deduction for Michaels on her 1993 income tax return, leading to the correct answer of D. $0.