Question

Anne is a self employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month). What amount of interest and insurance can Anne deduct this year

Answer 1

To determine the amount of interest and insurance that Anne can deduct for the current year, we need to calculate the portion that applies to the current year.

1. **Interest Deduction:**
- Anne paid $2,280 of interest on a loan that accrues evenly over 19 months.
- The interest accrues from June 1st of this year through December 31st of next year.
- So, for the current year, which starts on September 1st, there are 4 months remaining (September, October, November, December).

To calculate the interest deduction for this year, we take the monthly interest amount ($120) and multiply it by the number of months in this year (4 months):

Interest Deduction = $120 per month * 4 months = $480

Anne can deduct $480 of interest for this year.

2. **Insurance Deduction:**
- Anne paid $2,700 for 18 months of professional liability insurance.
- The insurance covers 18 months, so to determine the deductible amount for this year, we divide the total cost by the total number of months.

To calculate the insurance deduction for this year, we divide the total cost by 18 months and then multiply it by the number of months in this year (4 months):

Insurance Deduction = ($2,700 / 18 months) * 4 months = $600

Anne can deduct $600 of insurance for this year.

So, Anne can deduct a total of $480 for interest and $600 for insurance for the current year.