Malcolm owns 60% and Buddy owns 40% of Magpie On July 1, 2015, each lends the $30,000 at an annual interest rate of 10%. Malcolm and Buddy are not related. Both shareholders are on the cash method of accounting, and Magpie is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2016, Magpie repays the loans of $60,000 together with the specified interest of $6,000.
a. How much of the interest can Magpie deduct in 2015? In 2016?
b. When is the interest included in Malcolm and Buddy’s gross income?
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