When Kelley couldn’t make several monthly payments on a business loan, her brother Mike made three of the monthly payments of $700 each, a total of $2,100

($1,950 for interest expense and $150 for principal) for Kelley’s loan. Kelley makes the other nine monthly payments herself ($5,850 for interest expense and

$450 for principal).

a. What is Mike’s deduction for interest expense?

b. What is Kelley’s deduction for interest expense?

c. What could they have done to preserve the tax deductions? Explain.

AppendixLO1