Interest & Debt - Mini CourseCode: 25-INT2

Course Objectives:

After reading the materials, participants will be able to:

1. Define "interest" and determine whether and how much is tax deductible by:

a. Describing what constitutes bona fide debt considering economic substance, purpose, and differences that such debt has from installment sales, long-term & leveraged leases, and annuities;

b. Explaining how transactions with family members and controlled corporations can recharacterize alleged indebtedness into gift or business equity pointing out the factors used in this recharacterization and;

c. Listing four incentives to use corporate debt instead of equity while contrasting the special treatment of failed equity investment under §1244.

2. Categorize deductible interest types and identify special calculation concepts and procedures by:

a. Allocating interest based on debt's business or personal purpose pointing out the application of any carryover rules;

b. Determining net investment income demonstrating its impact on the deductibility of investment interest;

c. Explaining the special tax treatment given to student loans, margin accounts and market discount bonds noting what happens to any disallowed interest expense; and

d. Describing the timing considerations in interest reporting including interest paid in advance.

3. Categorize nondeductible interest types and identify provisions that through restriction create nondeductible interest by:

a. Determining whether interest is nondeductible personal interest under §163(h)(1);

b. Explaining 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. Analyzing the treatment of certain commitment fees and service charges based on R.R. 67-2897 and caselaw.

4. Deduct interest under the cash or accrual method noting the special elections applicable to and treatment of carrying charges under §266, below-market loans, and imputed interest.