Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan's business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes?
a) Capitalize the interest as part of the basis of the business property.
b) Deduct the current year's interest and amortize the balance over the next two years.
c) Capitalize the interest and amortize the balance over the 10-year loan period.
d) Deduct the entire amount as a current expense.
Ans: b) Deduct the current year's interest and amortize the balance over the next two years.
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