Int on Closed Business Loan

[equinecpa]

I have a client who formerly was self employed. While in business purchased large expensive trailer for business. Client is employed as an employee and no longer is using this trailer for business. The loan is still outstanding. Is the interest deductible anywhere?

I'm thinking not as the client has chosen to keep the trailer, it is now a personal asset isn't it?

Carolyn

[Roland Slugg]

Concur with your opinion

Dear equinecpa

If the trailer was converted to personal use, the interest became a non-deductible personal expense at that time. However, if it was not converted to personal use and is not used for personal purposes, the ongoing interest (and other expenses, if any) continues to be a business expense reportable on Schedule C. I can find no rules requiring the capitalization or cessation of interest deductions in such situations.

Having said that, a Schedule C with deductions but no income would likely be an audit-attracting red flag. It would not be unreasonable for the IRS to assert that continuing to own the trailer rather than selling it after the business was shut down is prima facie evidence that the trailer was converted to personal use. This, in turn, could cause the IRS to look at prior years' returns, questioning the business use percentage of that trailer ... and who knows what else? Thus, unless there is absolutely no personal use of that trailer, and no concern of what an audit might unearth, I would advise my client to not deduct the interest.

[JG EA]

I have this situation with a client. A loan was taken out on a home equity and use for a business that failed. My client is still repaying that loan. It has been many years. No red flag yet. It is marked interest on the C and a loss. The loan has not been increased or changed in any way it is just being paid off slowly. I did some research on it and nothing definitive but I feel comfortable taking this expense.

[Y2KEA]

What kind of trailer? Does it qualify as a second home?

[Roland Slugg]

I have this situation with a client. A loan was taken out on a home equity and use for a business that failed. My client is still repaying that loan.

That situation is really quite different from the one above. In your client's case nothing was converted to personal use, so the ongoing interest relates to the failed business. In the case of the trailer discussed above, it is likely that the trailer was converted to personal use, and if it was, the interest was converted too.

However, your point about the Schedule C losses not attracting the attention of the IRS is encouraging.