Interest deduction not limited to amount accrued

Article Abstract:

A Tax Court has ruled that, in cases where a cash method taxpayer utilizes a non-interest-bearing note with installments for payment, the unstated interest is deductible even though it exceeds the interest economically accrued by the date of the first installment. Unstated interest in deferred payment sales contracts may be imputed when a sales contract sets an unrealistically low rate of interest or does not provide interest. Cash basis taxpayers who prepay interest may not deduct interest expenses in the year a prepayment is made under Section 461(g). Cash basis taxpayers are required to capitalize the interest and deduct it under the accrual method so the prepaid interest is allocated to the year in which the interest serves as the cost of use of the borrowed money.

Cases, Tax courts

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Borrowing may not be the best way to finance investments

Article Abstract:

The Revenue Reconciliation Act of 1990 added Section 68 to the Internal Revenue Code, which phases out specific itemized deductions for taxpayers with adjusted gross incomes over $100,000. Section 68 limits deductions of investment interest to curb abuses by high-income taxpayers who have been purchasing investment property that produces a minimal amount of income to qualify for tax deductions on the interest. Section 68 implemented a phase-in of the disallowance from 1987 to 1990, which effectively limited the deduction to net investment income, the excess of income over expenses related to a taxpayer's investment property.

Tax accounting

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How to avoid disallowance of deductions on interest incurred for investments

Article Abstract:

Interest deductions related to interest earned on investments can be deferred or eliminated, based on the taxpayer's maintenance of documents verifying the application of the funds borrowed. Funds applied to investments are deductible. Investment interest deduction regulations are discussed as they apply to construction loans, net leases and the alternative minimum tax computation. The legal definitions and case laws surrounding the concept of property held for investment are also detailed.

Leases, Minimum tax, Loans

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