Dumbo is an executive at Monsters Inc. Monsters loans Dumbo $25,000 at a stated interest rate of 2%. The prevailing federal interest rates are 6%. Dumbo uses the loan proceeds to purchase a new parachute for his personal use. What are the tax consequences to Dumbo as a direct result of the imputed interest provisions?

Group of answer choices

$1,000 of interest expense, none of which is deductible, and $1,000 of taxable compensation

$1,000 of interest expense, all of which is deductible, and $1,500 of taxable compensation

$500 of interest expense, none of which is deductible, and $1,500 of taxable compensation

$500 of interest expense, all of which is deductible, and $0 of taxable compensation