Question

Identify the interest-expense categories. Which of the categories noted have limitations on amounts that can be deducted when filing a business tax return?

Answer 1

Interest-expense categories

1) Types of interest deductible as itemized deductions on Form 1040, Schedule A, Itemized Deductions, is inclusive of:

--Investment interest (limited to the net investment income)

--Qualified interest on mortgage including points (if it is the buyer)

2) Types of interest deductible elsewhere on the return is inclusive of:

--Student loan interest as an adjustment to income

--Farm business interest

--Non-farm business interest

--Interest paid to produce royalties or rents

3) Types of interest not deductible are personal interest, such as:

--Credit card and instalment interest is paid for personal expenditure

--Interest paid on a loan for purchasing a car for personal use

-- Credit investigation fees, service charges, and interest relating to tax-exempt income, such as interest for purchasing or carrying tax-exempt securities.

Generally, the deduction for investment interest expense is limited to the net investment income. Thus the interest expense cannot exceed the income generated from the investment. However may be able to carry over excess interest expenses to a future year's taxes.