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Taxpayer mortgaged home to pay business tax debts

  • 1.  Taxpayer mortgaged home to pay business tax debts

    Silver Most Valuable Member
    Posted 05-14-2019 17:51
    Taxpayer took out $750,000 mortgage to pay off $700,000 federal and state trust fund debts for payroll taxes he never deposited for his C corp
    Funds went directly to IRS and NYS to satisfy instead of going to his company accounts and then paid out to tax authorities.

    He borrowed $750K to pay off $700K of business debts.
    I do his business return only.
    His personal tax preparer says he can only deduct interest of the $50K.
    I say these weren't his liabilities and he in effect, loaned business $700,000 to pay it's debts so all mortgage interest should be deductible.

    Thoughts? Opinions? Reference sources?

    Thank you

    Alfonso J. Mollica CPA.

  • 2.  RE: Taxpayer mortgaged home to pay business tax debts

    Bronze Most Valuable Member
    Posted 05-15-2019 04:38

    Your question isn't clear as to where the interest deduction is being claimed to be deductible. Corporation or personal.

    $ 700,000 should be booked into the corporation to pay off the tax debts, and offset to a loan payable account or shareholder loan. I believe the TCJA put in some restriction on the amount of interest expense to deduct (Section 163j) and preparation of Form 8990. But you need to read the specific provisions for applicability. Depending upon how the loan was written, if a shareholder loan, isn't interest on loans in excess of $ 10,000 supposed to be calculated with deemed interest income to shareholder under the less-than-market rate loan theory?

    As far as his PERSONAL tax return interest - I believe the accountant is correct because the interest on $ 50,000 is investment interest as it was taken to protect his investment in the corporation.

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  • 3.  RE: Taxpayer mortgaged home to pay business tax debts

    Silver Most Valuable Member
    Posted 05-15-2019 16:44
    ​Isn't the mtg. interest rule now also limited to only qualified expenses?  I believe so.

    Robert Barnett
    CPA, ESQ.
    Capell Barnett Matalon & Schoenfeld LLP