Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2012. He prepaid all $3,600 of the interest on the loan on December 1, 2012. Joe can deduct all $3,600 of the prepaid interest in 2012.

Question

Quizplus · Accepted Answer

Under the cash basis method, prepaid interest must be capitalized and can only be deducted in the period to which it applies, not when it is paid. Therefore, Joe cannot deduct the entire $3,600 in 2012.

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