Wednesday, Could 11, 2022
Hasen: Curiosity Deductibility
David Hasen (Florida; Google Scholar), Curiosity Deductibility:
The correct tax therapy of curiosity expense has been a topic of disagreement because the inception of the fashionable earnings tax within the early twentieth century. On one view, the aim of the financing transaction dictates the tax therapy of curiosity in order that curiosity paid on borrowing used to finance consumption must be nondeductible, whereas enterprise curiosity must be deductible. On one other view, curiosity paid doesn’t finance a consumption merchandise however quite a mere shift in sources and due to this fact must be deductible in any respect occasions, assuming the recipient contains the curiosity obtained in earnings.
Each of those views result in conundrums that can not be resolved with out contemplating the broader query of why some bills are deductible in any respect. Specializing in that query, it seems that enterprise curiosity, like some other enterprise expense, ought to usually be deductible as a timing or an accounting precept below an earnings tax. That precept doesn’t apply to non-public curiosity expense. However, there could also be an unbiased foundation to allow a deduction for private curiosity expense that’s grounded in concerns of vertical fairness.
A associated query arises when mortgage proceeds finance the acquisition of enterprise property which can be taxed below consumption tax rules. Congress has recently sought to restrict curiosity deductibility on this setting due to the arbitrage profit that it gives, however a greater strategy could be to use consumption tax rules extra persistently to the general association. Such an strategy would maintain enterprise curiosity deductible, however mortgage proceeds could be includible in gross earnings in entire or half.
https://taxprof.typepad.com/taxprof_blog/2022/05/hasen-interest-deductibility.html
