- 6 - amortizable over 15 years rather than 30 years. The issue, however, is whether petitioners should have been allowed to deduct the entire $4,400 in 1999. Section 163(a) allows a deduction in full for interest paid or accrued within the taxable year on indebtedness. For Federal income tax purposes, interest generally is defined as “compensation for the use or forbearance of money”. Deputy v. duPont, 308 U.S. 488, 498 (1940). With regard to prepaid interest, however, section 461(g) provides in part: SEC. 461(g). Prepaid Interest. (1) In general. If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which * * * is properly allocable to any period–- (A) with respect to which the interest represents a charge for the use or forbearance of money, and (B) which is after the close of the taxable year in which paid, shall be charged to capital account and shall be treated as paid in the period to which so allocable. Therefore, a cash basis taxpayer must amortize prepaid interest over the life of his loan just as if he were on the accrual method of accounting. There is an exception, however, that allows a taxpayer to deduct the full amount of points paid “in respect of any indebtedness incurred in connection with thePage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011