Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2019.He prepaid all $3,600 of the interest on the loan on December 1, 2019.Joe can deduct only $300 of the prepaid interest in 2019.

Question

Quizplus · Accepted Answer

Under the cash basis method, taxpayers can deduct prepaid interest only in the year to which it relates. In this case, since the loan is for 12 months and the interest was prepaid on December 1, 2019, only the portion of the interest that relates to December can be deducted in 2019, which is $300 ($3,600/12). The remaining $3,300 may be deductible in future years as the interest accrues.

Joe, a Cash Basis Taxpayer, Took Out a 12-Month Business