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the table “Present-Value Computation
Because disallowed investment interest in Example 2.”) Thus, L saves $2,787
($7,547 − $4,760) by not making the
expense carries over indefinitely, deciding election. The result might be somewhat
whether to make the election may require different if L were not able to realize a
tax benefit from the disallowed interest
an analysis that includes a number of future expense until tax years after 20X2 or
tax years. his 20X2 tax rate bracket was less than
40%. ■

include net capital gains in net invest- If no election is made, L will pay Contributor
ment income in 20X1. The table $4,760 tax on his interest and capital
“L’s Investment Income and Interest gain in 20X1. If the election is made, Patrick L. Young, CPA, is an executive
Expense in Example 2” summarizes L’s the tax is shifted to 20X2 but amounts editor with Thomson Reuters Checkpoint.
tax situation for the investment income to $8,000. If the $8,000 tax for 20X2 For more information about this column,
and investment interest expense based is discounted back to 20X1 using a 6% contact thetaxadviser@aicpa.org.
on his projections for 20X2. discount factor, the result is $7,547. (See

L’s investment income and interest expense in Example 2

No election Election made

20X1 20X2 20X1 20X2
Tax rate 45% 40% 45% 40%
Tax on $20,000 net capital gain* $4,760 $— $9,000 $—

Tax on investment income 4,500 8,000 4,500 8,000
†
Tax savings from investment interest expense (4,500) (8,000) (13,500) —
Net tax $4,760 $0 $0 $8,000

* If the election is not made, the net capital gain is taxed at 23.8% (20% + 3.8% net investment income tax); with the election, the
applicable rate is 45%.
† If no election is made, $10,000 of investment interest is deducted in 20X1, and $20,000 is carried over and deducted in 20X2.

Present-value computation in Example 2

FV
PV =
PV =
(1 + i) n
Where FV = future value; i = discount rate; and n = number of full periods (years).
$8,000 FV
$8,000
= = = = $7,547
(1 + 0.06) (1 + i) n

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