Joe,a cash basis taxpayer,took out a 12-month business loan on December 1,2015.He prepaid all $3,600 of the interest on the loan on December 1,2015.Joe can deduct only $300 of the prepaid interest in 2015.

Question

Quizplus · Accepted Answer

Cash basis taxpayers can only deduct prepaid interest that applies to a period of less than 12 months in the year it is paid. In this case, since Joe prepaid interest for a 12-month loan, he can only deduct the portion that applies to the month of December 2015, which is $300. The remaining $3,300 will be deducted over the life of the loan.

Joe,a Cash Basis Taxpayer,took Out a 12-Month Business Loan on December