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    Interest deduction

    Hi all. TP borrowed $ in 2012 to buy equipment and fix building. TP paid int in 2012 but did not get business open untill 2013. Can I deduct int in 2012 or must I allocate the int to the building and equipment for dep in 2013 or amortize the int starting in 2013? my brain is in a fog this am. Manny thanks. Business was not open in 2012

    #2
    Can I deduct int in 2012 or must I allocate the int to the building and equipment...?
    Well, your client has a choice.

    Interest is excluded from the definition of "start-up expenses," so unless it is personal interest it is deductible in the year paid (or accrued by an accrual-basis taxpayer).

    "The term "start-up expenditure" does not include any amount with respect to which a deduction is allowable under section 163(a), 164, or 174." Code 195(c)(1) (Section 163(a) deals with interest expense.)

    However ...

    Regs 1.266-1 allows a taxpayer to elect to capitalize certain expenses, and interest is one of them. The interest allocable to the portion of the loan used to improve the building is covered by Regs 1.266-1(b)(1)(ii), and the interest allocable to the portion of the loan used to acquire the equipment is covered by Regs 1.266-1(b)(1)(iii). The Regs also describe the date, for each type of property, up to which interest may be capitalized.

    Keep in mind that Regs 1.266-1 are elective, so a written statement making the election must be attached to the original return for which it is made. There is no requirement that the election be made on a timely filed return, so your client is not too late. See Regs 1.266-1(c)(3) and 1-266-1(e) for the specific requirements of the election and how to allocate between two or more items.
    Roland Slugg
    "I do what I can."

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      #3
      Thank you for this direction. Did go and read multiple regs concerning this. Needed some direction.

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