Answer the following statements true (T) or false (F)

Question

1. Subject to net equity and dollar limitations, a taxpayer may deduct interest on a home equity loan, secured by the residence, used to purchase an automobile.
2. While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.
3. PG LLC is an accrual method partnership, manufacturing drones. Patty, 75% partner in PG and a cash method taxpayer, lends $100,000 to PG as a working capital loan on January 1, 2018, with interest due at an arms-length rate. PG accrues, and reports on its income statement, $5,000 of interest expense on this loan. PG pays the interest due to Patty on January 2, 2019. On PG LLC's 2018 tax return, it will deduct the $5,000 interest expense.
4. Christopher, a cash-basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2018. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2018 is $20.
5. Charitable contributions made to individuals are deductible if the individuals can show extreme financial need.

Answer 1

1. FALSE
Interest on home equity indebtedness can only be deducted if the proceeds are used to make improvements to the qualified residence.
2. TRUE
Prepaid interest must generally be capitalized and amortized, but an exception allows immediate deduction only in the case of points paid for a loan to purchase a primary residence.
3. FALSE
Because PG and Patty are related parties, and Patty will not report the income until 2019, PG cannot deduct the expense until 2019.
4. FALSE
He is a cash-basis taxpayer and does not pay the interest until the following year.
5. FALSE
Charitable contributions made directly to individuals are generally not deductible.