Question

1. Gonsalo runs a business doing car repairs, writes up his taxes on the cash basis, and on the calendar year.

Gonsalo paid $ 27,000 to his landlord on 12-1-2018 for a required advance rent payment on an 18 month lease covering the months 12-1-2018 through 5-31-2020.

Gonsalo paid $ 12,000 on 7-1-2018 for a one year insurance policy covering the months of 7-1-2018 through 6-30-2019. A payment of $ 16,000 was made on 7-1-2019 for a one year policy covering the period of 7-1-2019 to 6-30-2020.

Gonsalo has a business use only credit card, used to purchase supplies.    A purchase was charged on 12-30-2018 for supplies of $ 4,000, buying in bulk to receive a quantity discount, and another $6,000 purchase of supplies was charged on 8-1-2019 to fill up the stocks for 2019, and for the early months of 2020. Gonsalo paid the interest on the credit card in the amount of $ 2,500 during 2019 and has paid the principal balance on the credit card down by $ 8,000 so far by the end of 2019.

Finally, on 11-30-2018, Gonsalo signed and gave a note payable to a supplier for $3,000, due to be paid with accrued interest on May 30, 2019 with 6% annual interest. The note has a below market interest rate, and is worth $ 2,950. Gonsalo made the required payment when due. All of the purchased supplies had been used by May 2019.

How much of these payments qualify as tax deductible expenses for Gonsalo during 2019?

Answer 1

The Rent Paid is not applicable for tax deductions since the same is not a rent for business nor for a self-owned property. It is a payment done for primary residence, which is not tax deductible.

Also, the Insurance Policy and One Year Policy specified are not applicable for tax deductions since there is no specification that the same is a Medical Insurance (Medical Insurance is applicable for tax deductions).

Since the credit card is a business use only credit card therefore any business credit card fee or credit card company charge incurred by business through usage for business related transactions are eligible for tax deduction as business expense. Therefore, the amount $2500 as Interest Paid for credit card transactions are tax deductible.

The note payable had a below market interest rate and therefore on an amount of $3000 the payment to be done was $2950 therefore suggesting that there was no interest paid and therefore no amount is to be included as tax deductible.

Therefore based on above payments an amount of $2500 qualifies as tax deductible expenses for Gonsalo during year 2019.