Katy Enterprises, LLC borrows $$1,000,000$ at $5\%$ interest for one year to build a headquarters building for their customer. When the construction is complete, Katy Enterprises will not have use of or access to their client's building. The construction $($and loan draw$)$ begins on January $1,2025,$ and construction will conclude on December $31,2025.$ What advice would you give Katy Enterprises as it relates to capitalizing the interest costs on the construction loan on their December $31,2025,$ financial statements?

This is not a qualifying asset for capitalized interest; do not capitalize this interest.

$$50,000$ of capital interest should be capitalized.

This is a qualifying asset. Interest should be recorded at the lessor of actual interest or avoidable interest.