On April 1 of the current year, Henry borrows $12,000 from the bank for a year. Because the note is discounted for the interest charge and Henry receives proceeds of $10,200, he is required to repay the face amount of the loan ($12,000) in four equal quarterly payments beginning on July 1 of the current year. Henry is a cash method individual.
a. What is the amount of Henry’s interest expense deduction in the current year with respect to this loan?
b. Assume the same facts except that the initial starting date when the repayments begin is April 1 of the following year. What is the amount of Henry’s interest expense deduction in the current year?
c. Assume the same facts as in Part b, except that Henry is an accrual method taxpayer and the loan will be outstanding for one year. What is the amount of his interest expense deduction in the current year?