Question on Co-mingling of funds

[Dusty2004]

Could you help me understand what problems there are with the following scenario and where to read a little more about it.

A Self Employed Taxpayer Borrows $50,000 in a Home Equity Loan.

Scenario 1) He immediately deposits the money into the business checking account and purchases a building with that money. Deductible interest for the business?

Scenario 2) He immediately deposits the money into his personal checking account. He also transfers money from his savings into his personal checking account. One week later he purchases a used car for a little less than the money he transferred from his savings. 3 weeks later he transfers the $50,000 into his business checking account and purchases a building with that money. Deductible interest for the business?

Where in the Tax Book would I best find this?

Thanks,

Dusty

[JohnH]

You have to look at the facts & circumstances - not sure this second scenario would be specifically covered anywhere, other than by pure chance. I think there's a close enough connection to establish there's a business reason for the $50K being borrowed for the building, but let's see what others say.

[Jesse]

I would agree with JohnH - but remember with the tracing rules you will need to make the election to treat the interest secured by the home as not secured by the home.

[Dusty2004]

John and Jesse

I would agree with JohnH - but remember with the tracing rules you will need to make the election to treat the interest secured by the home as not secured by the home.

Thanks - so co-mingling does not change how it is handled as long you make the election to treat as business income and not home equity income. Is there a special way to make the election or is just taking the interest as a business interest making the election?

Thanks,

Dusty

[AZ-Tax]

If not already, encourage your client to maintain books..

If not already, encourage your client to maintain books preferably with QB., better yet, you maintain your clients books and your charge accordingly regardless if its a Sch C.

[Gretel]

Thanks - so co-mingling does not change how it is handled as long you make the election to treat as business income and not home equity income. Is there a special way to make the election or is just taking the interest as a business interest making the election?

Thanks,

Dusty

Safe Harbor for interest tracing says 30 days. It seems like this requirement is met. After that it gets more complicated (don't asked just know what I said). The election is another part of making this interest deductible as business interest.