Debt & Interest: Deductibility, Special Calculation Concepts & Provisions
This course focuses on tax issues affecting the treatment of debt and interest deductibility. It covers the definition of bona fide debt, the impact of related parties, the avoidance of equity and lease characterization, and deductible versus nondeductible interest factors. Sticky cross issues such as the impact of at-risk rules under §465, passive loss restrictions of §469, and below-market rate loans under §7278 are examined. In addition, the accounting method treatment of interest, points, prepaid interest, and discounted loans are reviewed. Particular attention is given to imputed interest and original issue discount.
Course Information
Course No. M331
Format: Online pdf (78 pages). Printed book available.
Instructional Delivery Method: QAS Self-Study
Prerequisites: General understanding of federal income taxation.
Advance Preparation: None
Level: Overview
CPE Credit: 2 hrs.
Field of Study: Taxes: Technical
Course expiration: You have one year from date of purchase to complete the course.
Course Revision Date: February 2024
Objectives
Course Topics:
* Indebtedness
* Deductible interest & mortgage interest
* Investment interest
* Nondeductible interest
* Personal interest & capitalized interest
* At-risk rules
* Passive activity limitations
* Below-market interest rate loans
* Imputed interest on sales
* Original issue discount (OID)
Learning Objectives:
After reading the materials, participants will be able to:
1. Determine “interest” and select how much is tax deductible under §163 by:
a. Identifying what constitutes bona fide debt considering economic substance and purpose and the differences that such debt has from installment sales, long-term & leveraged leases, and annuities;
b. Specifying how transactions with family members and controlled corporations can recharacterize alleged indebtedness into gift or business equity naming the factors used in this recharacterization and;
c. Recognizing incentives to use corporate debt instead of equity and the special treatment of failed equity investment under §1244.
2. Identify deductible interest and special calculation concepts and procedures by:
a. Recognizing the allocation of interest based on the debt’s business or personal purpose specifying the application of any carryover rules;
b. Determining net investment income including its impact on the deductibility of investment interest;
c. Recognizing the special tax treatment given to student loans, margin accounts, and market discount bonds stating what happens to any disallowed interest expense; and
d. Specifying the timing considerations in interest reporting including interest paid in advance.
3. Recognize nondeductible interest types and provisions that through restriction create nondeductible interest by:
a. Identifying when interest is nondeductible personal interest under §163(h)(1);
b. Determining the disallowance of interest related to tax-exempt income under §265, the life insurance interest restrictions of §264; the §465 at-risk limitations and application of the §469 passive loss rules; and
c. Specifying the treatment of certain commitment fees and service charges based on R.R. 67-297 and caselaw.
4. Identify interest under the cash or accrual method recognizing the special elections applicable to and treatment of carrying charges under §266, below-market loans, and imputed interest.
