## Answers

b.

Compute business interest expense as follows:

million | |

Income before tax | 85 |

Less: total expense | -78.1 |

6.9 | |

Add: depreciation | 12.7 |

Add: net interest expense | 10.5 |

Adjusted taxable income | 30.1 |

Interest (30% * 30.1) | 9.03 |

Thus, business interest expense is 9.03 million.

c.

Compute maximum deduction allowed as follows:

million | |

Income before interest limitation | 6.9 |

Add: interest expense | 5.5 |

Add: depreciation | 12.7 |

Adjusted taxable income | 25.1 |

Interest (30% * 25.1) | 7.53 |

Maximum deduction allowed | 5.5 |

lower of 7.53 or 5.5) |

Thus, maximum deduction allowed of interest is 5.5 million.

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