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Are loan costs incurred under $5,000 expensed or capitalized?

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Level 3

Hi all,

I wanted to have a sanity check. I'm looking at Treas. Reg 1.263(a)-4 to determine if loan costs are expensed or capitalized if they're under $5,000. Under 1.263(a)-4(b), it says that intangibles must be capitalized and 1.263(a)-4(c)(1)(ii) specifically identifies debt instruments.

However, 1.263(a)-4(e)(4)(iii)(A) says that de minimis costs, which they define as paid in the process of investigating or otherwise pursuing a transaction, can be expensed under $5,000. But 1.263(a)-4(e)(4)(iii)(B) says that it doesn't include commissions.

So from these paragraphs, I'm interpreting it as loan costs are deductible (excluding commissions) if they are under $5,000. Does that sound right or am I missing anything?

Thanks in advance for any help.

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Level 3

It's actually a business loan for business expenses. It looks like I was in the wrong treasury regulation. I should've looked at 1.263(a)-5(a)(9) and 1.263(a)-5(d)(3). Thanks!

View solution in original post

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6 Replies 6
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Level 13

"or am I missing anything?"

You've completely overlooked the Purpose of this loan, what the funds were used to acquire or do, etc. Purpose...

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"Level Up" is a gaming function, not a real life function.
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Level 3

Sorry, I should've mentioned that. It is a business loan. 

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Level 13

"It is a business loan"

More details sure would help. Is there some reason you cannot be more forthcoming?

Acquired property? Buy inventory? Pay for improvements? Bought a vehicle or tools? Paid for a well to be drilled? Bought the rights to something?

For example:

Borrow to pay for Solar Panels means the costs are part of the asset.

Or, you state, "intangibles must be capitalized" But what is the intangible? Borrowed to buy Goodwill?

Then, you mention Commission, as in, bought Real Estate and took on a mortgage including needing to pay a real estate agent or buyer's agent or what?

Or, for your comment regarding debt instruments, did this person buy someone else's AR? As a Factoring agent?

Or, borrowed to pay off and get out of a lease?

Just borrowing money doesn't make the related costs of that loan Expense. It makes them whatever they are relative to that loan's purpose. Example:

Bought Real Estate to flip, so I needed the construction loan and incurred origination costs, an appraisal, and a build out projection, engineering, design fees, and there are commissions to pay = all part of the Other Asset as work in progress.

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"Level Up" is a gaming function, not a real life function.
Highlighted
Level 3

It's actually a business loan for business expenses. It looks like I was in the wrong treasury regulation. I should've looked at 1.263(a)-5(a)(9) and 1.263(a)-5(d)(3). Thanks!

View solution in original post

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Level 15

You're getting a good answer at 

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=19647


ex-AllStar
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Level 3

Yep, I just got the answer. Was in a rush to find it so I posted there also. 

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