Dealing with Debt and Interest - 24 CPE
This course brings the practitioner up-to-date information on tax issues affecting interest and debt. It covers the definition of bona fide debt, the avoidance of equity and lease treatment, imputed interest rates and debt modification. The various types of interest and their required allocation are explored and reviewed. For the economically troubled client, special attention is devoted to debt cancellation, repossession, discounts, and foreclosure. The program also discusses installment sales, equity participation debt, taxable interest, and bad debts.
Completion Deadline & Exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provided.
Course Level: Overview. This program is appropriate for professionals at all organizational levels.
Field of Study: Taxes
Prerequisite: General understanding of federal income taxation.
Advanced Preparation: None
Learning Assignments & Objectives
As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.
Chapter 1 Deductible Interest & Debt
At the start of Chapter 1, participants should identify the following topics for study:
* Deductible interest & mortgage interest
* Investment interest
* Nondeductible interest
* Personal interest & capitalized interest
* At-risk rules
* Passive activity limitations
* Below-market interest rate loans
* Imputed interest on sales
* Original issue discount (OID)
After reading Chapter 1, participants will able to:
1. Define “interest” and locate how much is tax deductible under §163 by:
a. Identifying what constitutes bona fide debt considering economic substance and purpose and stating how transactions with family members and controlled corporations can recharacterize alleged indebtedness into gift or business equity noting the factors used in this recharacterization; and
b. Listing four incentives to use corporate debt instead of equity, recognizing the special treatment of failed equity investment under §1244, and show the differences among debt from installment sales, long-term and leveraged leases, and annuities.
2. Outline deductible interest identifying special calculation concepts and procedures by:
a. Recognizing the allocation of interest based on the debt’s purpose noting the application of any carryover rules and defining net investment income stating its relationship investment interest deduction; and
b. Identifying the special tax treatment given to student loans, margin accounts, and market discount bonds noting what happens to any disallowed interest expense and listing the timing considerations in interest reporting including interest paid in advance.
3. Define nondeductible interest noting provisions that deny or restrict the deduction of interest by:
a. Recognizing when interest is nondeductible personal interest under §163(h)(1) and identifying the disallowance of interest related to tax-exempt income under §265, the life insurance interest restrictions of §264; the §465 at-risk limitations and the application of the §469 passive loss rules; and
b. Stating the treatment of commitment fees and service charges based on R.R. 67-2897 and case law.
4. Recognize the deduction of interest using either the cash method or accrual method, stating the special elections applicable to and treatment of carrying charges under §266, below-market loans, imputed interest and original issue discount.
After studying the materials in Chapter 1, answer the exam questions 1 to 25.
Chapter 2 Allocation of Deductible Interest
At the start of Chapter 2, participants should identify the following topics for study:
* Allocation period
* Proceeds not disbursed to borrower
* Proceeds deposited in borrower’s account
* Accrued interest
* Loan proceeds received in cash
* Loan repayments
* Continuous borrowings
* Loan refinancing
* Debt-financed acquisitions
* Debt-financed distributions
After reading Chapter 2, participants will able to:
1. Recognize the allocation of deductible interest based on the use and repayment of the loan proceeds and list the special rules for the allocation of interest expense in connection with debt-financed acquisitions of, and distributions from, partnerships and S corporations.
After studying the materials in Chapter 2, answer the exam questions 26 to 30.
Chapter 3 Home Mortgage Interest
At the start of Chapter 3, participants should identify the following topics for study:
* Secured debt
* Qualified home
* Special situations
* Mortgage interest statement - Form 1098
* Special rule for cooperative housing
* Home acquisition debt
* Home equity debt
* Mixed-use mortgages
* Grandfathered debt
After reading Chapter 3, participants will able to:
1. Identify three categories of mortgages and three characteristics of secured debt that influence the deductibility of interest, define “qualified home,” and recognize special situations affecting mortgage interest.
2. List eleven special situations that can impact the qualified home mortgage interest deduction.
3. Recognize the general rule for the tax treatment of points listing the nine exceptions, state when a taxpayer will receive a Mortgage Interest Statement – Form 1098 and which information is included on this statement to figure interest deductions.
4. Identify when a stock in a cooperative housing corporation owned by a tenant-stockholder is a qualified home allowing for a deduction of interest paid, and state the limits on the home mortgage deduction to ensure that appropriate deductions are taken.
After studying the materials in Chapter 3, answer the exam questions 31 to 42.
Chapter 4 Taxable Interest
At the start of Chapter 4, participants should identify the following topics for study:
* Dividends v. interest
* CDs & deferred interest accounts
* U.S. obligations
* Miscellaneous interest items
* U.S. savings bonds
* Education Savings Bond Program
* Bonds sold between interest dates
* Taxable interest on state or local government obligations
* Tax-exempt bonds bought at a discount
After reading Chapter 4, participants will able to:
1. Show the distinctions between dividends and interest noting the taxability of interest on CDs, deferred interest accounts, frozen deposits, and U.S. obligations and identify the treatment of nine other miscellaneous interest items.
2. Name the types of U.S. savings bonds listing their tax advantages and disadvantages, identify the tax treatment of bonds sold between interest dates, and state when life insurance proceeds are taxable or excludable from income.
3. Outline state or local government debt obligations identifying the nature of the activity they fund and its impact on whether the interest received from them is taxable.
After studying the materials in Chapter 4, answer the exam questions 43 to 51.
Chapter 5 Installment Sales
At the start of Chapter 5, participants should identify the following topics for study:
* Installment method
* Installment income
* Imputed interest & OID
* Related party sales
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