Interest Free Loan

[Nashville]

Client paid $36,000 for a vehicle and borrowed all the money on an interest-free loan. He is using standard mileage rate to deduct business portion of auto expense.

He could have bought the same vehicle for $30,500 and then paid $5500 in interest. Had he done this, he could have deducted the business portion of Interest in addition to the standard mileage rate.

We all know there is no such thing as interest-free use of money over time, and the IRS will "impute" interest if there is no stated interest. Can we therefore "impute" interest on this loan for purpose of deducting it?

IRS imputes interest income when it is to their advantage. Can we not do the same?

[ChEAr$]

What advantage?

Client paid $36,000 for a vehicle and borrowed all the money on an interest-free loan. He is using standard mileage rate to deduct business portion of auto expense.

He could have bought the same vehicle for $30,500 and then paid $5500 in interest. Had he done this, he could have deducted the business portion of Interest in addition to the standard mileage rate.

We all know there is no such thing as interest-free use of money over time, and the IRS will "impute" interest if there is no stated interest. Can we therefore "impute" interest on this loan for purpose of deducting it?

IRS imputes interest income when it is to their advantage. Can we not do the same?

I don't see the advantage. The whole vehicle cost is eligible for the section 179, so even
if you "creatively' tried to say 30,500 was cost of vehicle for depreciation purposes, you
would just have to draw up a chart on the 5500 interest and pro rate that over the live
of the loan.

[Nashville]

Standard Mileage Rate

Harlan, we are not taking s. 179 or actual expenses. Only 35% of this vehicle is used for business, about 7,000 miles per year unless something changes.

The standard mileage rate gives this guy a deduction of $3850, whether he paid $30,000 for the vehicle or $36,000 doesn't matter. However, if he pays $1500 in interest, we can add interest expense of $1500 X .35 or another $525 to his expenses, as interest, taxes and tolls can be added to the SMR.

Does this make sense?

[veritas]

It's been awhile

but if I recall correctly imputed interest is not required on a loan for personal property.

[erchess]

Document Document Document

An amount by which the cost of something increases when you do not pay for it in one lump sum at the time you take possession is interest in my opinion. Therefore IF he he has proof that he could have obtained it for less money by paying cash on the barrel head then I would deduct the additional cost over time as interest. But both you and he need complete copies of the documentation in your files.

[ChEAr$]

But of course

Harlan, we are not taking s. 179 or actual expenses. Only 35% of this vehicle is used for business, about 7,000 miles per year unless something changes.

The standard mileage rate gives this guy a deduction of $3850, whether he paid $30,000 for the vehicle or $36,000 doesn't matter. However, if he pays $1500 in interest, we can add interest expense of $1500 X .35 or another $525 to his expenses, as interest, taxes and tolls can be added to the SMR.

Does this make sense?

it makes sense now. I was reading it as a 100% business vehicle of course.

but still, just because he managed to get a zero percent financing rate doesn't mean he
can factor interest into the equation. I see no basis anywhere that IRS would go along with it, unless he has something in writing that gave him a choice between 100% of
cost with zero percent. or 96% of cost with 2%, 94% with 3%, etc etc. that MIGHT
be persuasive upon audit. However IRS types aren't known for having MBA's in finance
which would give them an appreciation for the time value of money.