Deduction of loan costs - business

[mactoolsix]

From Pub 936 page 7 & Pub 530 page 7

Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:
• Appraisal fees,
• Notary fees, and
• Preparation costs for the mortgage note or deed of trust.

And under Basis:

Here are some settlement and closing costs that you cannot deduct or add to your basis.
1. Fire insurance premiums
2. Charges for using utilities or other services related to occupancy of the home before closing
3. Rent for occupying the home before closing
4. Charges connected with getting or refinancing a mortgage loan, such as:
a. Loan assumption fees,
b. Cost of a credit report, and
c. Fee for an appraisal required by a lender.


Client feels "When it comes to business you can deduct all ordinary and necessary expenses, and the costs to procure a loan are ordinary and necessary."

I don't think these are deductible for business nor can they be added to basis, however I have not been able to locate a cite for this. The items in question are notary fees, #4b credit report and #4c appraisals required by the lender.

Any help?

[S T]

Pub 936 and Pub 530 are for Homeowners - however, I believe that the same applies to Business Loans, and that is how I have always treated. Notary, credit reports and appraisals I almost always add to basis.

TTB 6-2 (using 2014) has a really good chart and references line items of the Hud Statement - which you can probably match to your escrow closing on a Business Escrow. Good reference!

Sandy

[Roland Slugg]

The items listed are, in fact, NOT added to the basis of business or rental property purchased. Instead, all those costs listed that are incurred in connection with securing a loan, including a re-fi loan, are capitalized as loan costs and can be amortized (straight-line) over the term of the loan, and the unamortized balance is deductible when the loan is paid off.

[S T]

Roland,

Thanks, I stand corrected, the items outlined in OP are capitalized as loan costs (appraisal fee and credit report fee) and amortizable over the term of the loan

It is the title costs, etc that are added to basis -- noting that notary fees and document preparation are listed in that group as well

Sandy

[mactoolsix]

The items listed are, in fact, NOT added to the basis of business or rental property purchased. Instead, all those costs listed that are incurred in connection with securing a loan, including a re-fi loan, are capitalized as loan costs and can be amortized (straight-line) over the term of the loan, and the unamortized balance is deductible when the loan is paid off.

Roland - can you provide a cite as to that?

Notice the Pub says

" Here are some settlement and closing costs that you cannot deduct or add to your basis.

4. Charges connected with getting or refinancing a mortgage loan, such as:
a. Loan assumption fees,
b. Cost of a credit report, and
c. Fee for an appraisal required by a lender."


Capitalizing these costs and writing them off over time is a depreciation expense which is a deduction.

Thanks,
Mike

[Snaggletooth]

Amortizable

If a personal loan, none of these costs are deductible, depreciable, or added to basis.

If a business loan, all of these become amortizable (as opposed to depreciable). The accumulation is reported on a balance sheet as Prepaid Loan Costs, and the amortization occurs with the amount of principal paid.

I normally classify the amortization as "Other interest" (not Mortgage Interest) on a tax return.