This course focuses on tax issues affecting the treatment of interest and debt. It covers the definition of bona fide debt, the impact of related parties, the avoid-ance of equity and lease characterization, and deductible versus nondeductible interest factors. Sticky cross issues such as the impact of at-risk rules under §465, passive loss restrictions of §469, and below-market rate loans under §7278 are examined. In addition, the accounting method treatment of interest, points, pre-paid interest, and discounted loans are reviewed. Particular attention is given to imputed interest and original issue discount.
Completion Deadline & Exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provid-ed.
Course Level: Overview. This program is appropriate for professionals at all or-ganizational levels.
Field of Study: Taxes
Prerequisite: General understanding of federal income taxation.
Advanced Preparation: None
Learning Assignment & Objectives
As a result of studying the assigned materials, you should be able to meet the ob-jectives listed below.
ASSIGNMENT
At the start of the materials, participants should identify the following topics for study:
* Indebtedness
* Deductible interest & mortgage interest
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* Investment interest
* Nondeductible interest
* Personal interest & capitalized interest
* At-risk rules
* Passive activity limitations
* Below-market interest rate loans
* Imputed interest on sales
* Original issue discount (OID)
Learning Objectives
After reading the materials, participants will be able to:
1. Determine “interest” and select how much is tax deductible under §163 by:
a. Identifying what constitutes bona fide debt considering economic substance and purpose and the differences that such debt has from installment sales, long-term & leveraged leases, and annuities;
b. Specifying how transactions with family members and controlled corporations can recharacterize alleged indebtedness into gift or business equity naming the factors used in this recharacterization and;
c. Recognizing incentives to use corporate debt instead of equity and the special treatment of failed equity investment under §1244.
2. Identify deductible interest and special calculation concepts and procedures by:
a. Recognizing the allocation of interest based on the debt’s business or personal purpose specifying the application of any carryover rules;
b. Determining net investment income including its impact on the deductibility of investment interest;
c. Recognizing the special tax treatment given to student loans, mar-gin accounts, and market discount bonds stating what happens to any disallowed interest expense; and
d. Specifying the timing considerations in interest reporting includ-ing interest paid in advance.
3. Recognize nondeductible interest types and provisions that through restriction create nondeductible interest by:
a. Identifying when interest is nondeductible personal interest under §163(h)(1);
b. Determining the disallowance of interest related to tax-exempt in-come under §265, the life insurance interest restrictions of §264; the
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§465 at-risk limitations and application of the §469 passive loss rules; and
c. Specifying the treatment of certain commitment fees and service charges based on R.R. 67-297 and caselaw.
4. Identify interest under the cash or accrual method recognizing the special elections applicable to and treatment of carrying charges under §266, below-market loans, and imputed interest.
After studying the materials, answer exam questions 1 to 10.
Notice
This course and test have been adapted from materials and information contained in the above text and any supplemental material provided. This course is sold with the understand-ing that the publisher is not engaged in rendering legal, accounting, or other professional ad-vice and assumes no liability whatsoever in connection with its use. Since laws are constantly changing, and are subject to differing interpretations, we urge you to do additional research and consult appropriate experts before relying on the information contained in this course to render professional advice.
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