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Lonesome Interest Line


Edsel

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I have a client that lost $100,000 over the last 2 years in a failed business.  Being cash poor, they owe a half dozen loans totalling $120,000 which they will pay because the lenders are in a strong collateral position.

In coming years, they will thus encounter $5K to $8K in deductible interest expense.

The only way I believe I can report this will be on a Schedule C with zero revenue, and no other expenses.  I believe they are entitled to the deduction for interest, but it will appear as a single line item on an otherwise empty Schedule C.

Will this raise eyebrows??

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Putting it on Schedule C may not work since the business doesn't exist any more.

More likely it qualifies as Investment Interest, which may or may not be useful given the increased standard deduction.

The only other possibility is a capital loss deduction.

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I once asked an IRS agent at a tax seminar this same question.  He said yes you could if the loans had originated from the business; even if the business was no longer operating.  I had the same "lone item" audit concern and also asked about that.  He said that it probably would stand out, but was not an automatic audit, and was a legitimate business deduction.  So, if you're lucky, have no other risky items, and have the time for a possible audit...

At the time (about 12 years ago) a client had sold her rental apartments, still owed a large loan on them, and we made her a "lone ranger" interest expense entry on an "E" for about three years. She was never audited. 

Regards, BB

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On 5/17/2019 at 3:12 PM, Edsel said:

Will this raise eyebrows??

Sounds to me like you have an ordinary and necessary business expense that will be paid after the business discontinues operations.  Deductible in year paid by cash basis taxpayer regardless of raising eyebrows.  

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17 minutes ago, grandmabee said:

or you could post on line 21 as" prior business expense" as a negative number.

Since it is a business expense, why not report on C where it would also factor into calculation of earned income,.. SE income... etc if any?

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