Crown Corporation is an accrual method taxpayer owned 55% by Brett and 45% by Susie. Brett and Susie are good friends and have been business associates for several years. BJ Partnership is a cash method taxpayer, owned 40% by Brett and 60% by Jeremy, Brett’s uncle. Both Crown Corporation and BJ Partnership are calendar year entities. On January 5 of the current year, Crown borrows $50,000 from BJ Partnership and pays 8% interest on the loan. Crown must pay the interest on January first of next year.
a. What amount of interest expense can Crown Corporation deduct in the current year?
b. How would your answer change if Jeremy were Brett’s brother, instead of his uncle?