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Business puchased with a zero interest seller finance loan

Agreement is 200k over 6years with even payments.

 

How can I maximise interest expense deduction on the payments I am making to the seller. 

 

Can I prepare an amortized schedule with an interest rate and solve to equal the agreed upon monthly payment amount and then apply all early payments to accrued interest only and once that accrued interest is done apply remaining payments to principal. 

 

 

 

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4 Replies
AliciaP1
Expert Alumni

Business puchased with a zero interest seller finance loan

You cannot.  If you are not incurring interest expense on the loan, you cannot deduct interest expense.

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Business puchased with a zero interest seller finance loan

Turbotax has a web page about imputed interest

https://turbotax.intuit.com/tax-tips/tax-payments/irs-tax-rules-for-imputed-interest/L7UbulHpC 

if a sales agreement for income producing property does not provide for interest or the stated interest rate is less than the applicable federal rate, rules for calculating imputed (unstated) interest may apply. either IRC Sec 1274 https://www.law.cornell.edu/uscode/text/26/1274 or IRC Sec 483         https://www.law.cornell.edu/uscode/text/26/483 can apply to an installment sale contract. under both rules, part of the installment sales price is treated as interest, whether or not interest is called for in the agreement . 

any imputed interest reduces the buyer's basis in the buyer's basis in the property

also IRS Pub 537 https://www.irs.gov/pub/irs-pdf/p537.pdf 

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as you will notice the rules are complex and there can be situations where neither apply. IRC 1274 doesn't apply because the sales price is less than $250K.  However, it would appear IRC 483 applies because the payments will be over 6 years and it seems none of the 483 exceptions apply. it might be best to consult a tax pro who can look over the contract also because of the next item that you may not be aware of

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 both buyer and seller must include in their returns that include the business an asset allocation statement form 8594

Purpose of Form Both the seller and purchaser of a group of assets that makes up a trade or business
must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets. Form 8594 must also be filed if the purchaser or seller is amending an original or a previously filed supplemental Form 8594 because of an increase or decrease in the purchaser's cost of the assets or the amount realized by the seller.

Who Must File
Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120-S, etc.) when there is a transfer of a group of assets that makes up a trade or business and the purchaser's basis in such assets is determined wholly by the amount paid for the assets. This applies whether the group of assets constitutes a trade or business in the hands of the seller, the purchaser, or both

Penalties
If you do not file a correct Form 8594 by the due date of your return and you cannot show reasonable cause, you may be subject to penalties. See sections 6721 through 6724

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if the imputed interest rules apply this is going to present some difficulties in completing the form since your total cost allocated will have to take into a/c the reduction for imputed interest.   the sole purpose of 8594 is for the IRS to check the buyer's form against the seller's form to see if both are using the same numbers for the same items. this will probably not be the case if imputed interest applies and the seller ignores the rules. then both can expect a notice from the IRS.  

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also you will need to issue the seller form 1099-int. but no you can't do it your way and deduct the entire payments as interest until you've deducted all the interest. each payment would be part principal and part interest based on the amortization table.

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since the term is 6 years you would use the mid-term 100% AFR rate in effect for the date of the transaction

 

 

 

 

 

Business puchased with a zero interest seller finance loan

Thanks for your response.

Business puchased with a zero interest seller finance loan

I appreciate your time on my question and thank you for the very detailed response much appreciated. 

I agree with you on the section 483 and I am aware of Form 8594. I think I may have to recharacterize some of the principal to unstated interest. How do I know which compouding period to use on the AFR schedule?

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