Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2018. He prepaid all $3,600 of the interest on the loan on December 1, 2018. Joe can deduct only $300 of the prepaid interest in 2018.

Question

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According to the IRS rules, a cash basis taxpayer can deduct prepaid interest only in the tax year to which it relates. Since Joe prepaid all $3,600 of the interest on the loan on December 1, 2018, he can deduct only $300 of the prepaid interest in 2018, which is the interest for one month. The remaining $3,300 can be deducted in the future tax years to which they relate.

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