Academic journal article Journal of Accountancy

Deducting Interest on Tax Deficiencies

Academic journal article Journal of Accountancy

Deducting Interest on Tax Deficiencies

Article excerpt

According to Internal Revenue Code section 6601, taxpayers must pay interest on any overdue tax payments until the tax is paid. Can an individual taxpayer deduct this interest on a personal tax return?

Section 163(a) says a taxpayer may deduct all interest paid or accrued within the taxable year. However, section 163(h)(1) says no deduction is allowed for personal interest paid or accrued during the taxable year. Temporary Regulation 1.1639T(b)(2)(i)(A) says it includes interest paid on underpayments of individual federal, state or local income taxes and on indebtedness used to pay such taxes, regardless of the source of the income generating the tax liability.

Contrary to the temporary regulation, section 163(h)(2)(A) says personal interest is any that can not be considered "properly allocable to a trade or business" or "investment interest," which are deductible.

In James W. Tippin v. Commissioner (104 T.C. No. 26, 1995), a tax attorney who filed for bankruptcy under Chapter 11 paid interest on his overdue 1983 federal income taxes and deducted it as a business expense on his personal income tax return. …

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