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I purchased business equipment under an equipment finance agreement. The contract requires 60 payments of $800 per month ($48,000 in total payments). The equipment purchased under the agreement cost $36,000 so there is $12,000 in interest required under the contract. During year 1, I deducted interest expense of $2,400 ($12,000 / 5 years). In year 2, I want to pay-off the entire loan early. However, I am still liable for the remaining $9,600 in interest under the terms of the contract. If I pay-off the contract in year 2, can I deduct the entire $9,600 as interest expense on that year's tax return?
ANSWER
The BIDaWIZ Team's Answer:
Unfortunately, you cannot deduct any interest paid before the year it is due. This means that you can only deduct interest as it is due over the 5 year period. This is referenced in IRS Publication 535 and IRC Section 461(g).
