prepaid interest

Prepaid interest

An asset account showing interest that has been paid in advance, which is expensed and charged to the borrower's P & L statement.

Prepaid Interest

Interest on a loan that is paid before it is billed to the borrower. Generally speaking, the IRS does not allow the deduction of prepaid interest even when the interest would be deductible otherwise.

prepaid interest

The interest on a loan that has been paid but is not due until a following period. The Internal Revenue Service does not permit taxpayers to claim an itemized deduction on tax returns for prepaid interest.

prepaid interest

An interest paid in advance of the time it is earned, as with discount points. Prepaid interest is not tax deductible unless all the following specific requirements are met:

1. The loan is secured by the taxpayer's primary residence.
2. Paying discount points is an established business practice in the area.
3. The points paid were not more than customarily charged in the area.
4. The taxpayer uses the cash method of accounting.
5. The points were not a substitute for normally itemized expenses such as the appraisal fee, survey fee, property taxes, and attorneys' fees.
6. The funds provided at closing by the buyer and by the seller, if applicable, were at least equal to the points (in other words, you didn't roll the points into the loan).
7. The loan is used to buy or build the primary residence.
8. The points were computed as a percentage of the loan.
9. The settlement statement (HUD-1) clearly shows the item as points.

Prepaid Interest

Interest paid in advance is deductible only as it accrues. The one exception to this rule is for certain points paid by a cash-basis taxpayer to obtain financing for a loan used to purchase, reconstruct, or improve his or her principal residence.
References in periodicals archive ?
And, since discount points are considered prepaid interest, you can deduct those from your taxes as well.
The car will be given as prepaid interest on the certificate of deposit.
The Company shall have the right to prepay the Notes at any time for an amount equal to 120% of the principal amount of such Notes and accrued and unpaid interest on the principal amount of the Notes (it being understood that any and all prepaid interest shall be forfeited as a penalty).
According to the court, by denying a deduction for prepaid interest, the code authorizes a deduction for all interest paid for the tax year--even if it is paid in advance.
461(g)(1) requires a cash-method taxpayer to capitalize and amortize prepaid interest.
One area that seems to confuse a lot of people is the tax treatment of points, or prepaid interest, says Michael Van Den Akker, a tax partner in Price Waterhouse's San Francisco office.
In general, in determining the year (or years) in which to deduct prepaid interest, IRC Section 461(g) forces cash basis taxpayers to follow the accrual basis method of tax accounting.
In a LIFE transaction, Tradewind Settlements pledges life settlement contracts as collateral for a new loan with prepaid interest while concurrently purchasing non-performing loans or assets from the bank.
In Clardy,(22) the convicted aider assisted taxpayers in filing false income tax returns that claimed prepaid interest deductions to which they were not entitled.
Internal Revenue Code section 461(g)(2) considers points prepaid interest and says they are deductible as interest if paid directly by taxpayers out of their own funds to a bank or financial institution for the use of money and not for specific services performed in connection with a loan.
Points are paid by a borrower to a lender as a prepaid interest charge for the loan in the year the loan is made.
On January 26, 2007, Scripps Investments & Loans provided Mission Storage LLC, with $14,000,000 for: the refinance of existing debt, and to provide for 9 months of prepaid interest and transaction related expenses.