[CPA Dex]

Q:

12/1/10 taxpayer borrowed $100K for business. Loan to be repaid on 11/30/11 (less than one year). Taxpayer prepaid entire $12K interest amount on date of loan issuance, 12/1/10. What amount of interest is deductible in 2011?

Correct answer is $11,000

My answer is $0, because a taxpayer is not required to capitalize as long as the benefit does not extend beyond 12 months after the first date the benefit is received. Why is the book capitalizing this and deducting 1/12 in 2010 and 11/12 in 2011 when the taxpayer can take the full deduction in 2010?

[Anonymous]

You generally cannot deduct any interest paid before the year it is due. Interest paid in advance can be deducted only in the tax year in which it is due, this can be found in IRS publication 535 Business Interest expense.

So of the 12000 paid, only the 1000 due for December 2010 is deductible in 2010 and the remaining 11000 will be deductible in 2011

[CPA Dex]

Well, that's nice to know. I didn't see that in the book. The example they gave was you pay $12,000 of insurance in December. Since it's a 12 month policy (not greater than 12 months) it is fully deductible in the year of payment. I guess interest is the only exception? That's what I'll tell myself anyway. Thanks!

[Anonymous]

What book are you using? This is a very commonly tested rule. You can only deduct interest when it is both paid AND incurred meaning you can't deduct prepaid interest (can only deduct the portion incurred during the year).

[TheBsEr]

This was mentioned in the Becker book. It was in the section of Deductions from AGI and under Interest Expense. It said something about “Allocate interest expense to the period incurred if it was paid”.

AUD - 91
FAR - 90
REG - 87
BEC - 91
Ethics - 98

[Author]

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