Prepaid Interest?

[Diane]

My client - a SubS corp - has a bank loan. They are making extra payments on the loan as cash flow allows. The bank is calculating prepaid interest for the 1098. Our loan balance matches the bank statement.

Interest Paid = $19000.00 (matches our figures)

c/o from 2007 = $1700.00

c/o to 2009 = $3400.00

Amount reported on the 1098 = $17300.00

I don't think I've ever come across this before. The interest usually is what has been paid/calculated for the year. In this case the $19000.00. I've asked what would happen if they paid off the loan? Answer = forgiven interest.

Diane

[kcjenkins]

Two things for you to do. One, deduct the $19K of interest actually paid. You keep a copy of that report, and if the IRS questions the deduction, you have your proof right there. Put the $17300 on the line for 'interest reported on 1098, and put the rest on the 'other interest line.

Second, tell the client from now on, on every payment, to write clearly on the check, "excess to be applied to principle". Then they have to do it right. He's getting charged extra interest if they do not reduce the principle, instead holding the extra as 'prepaid interest'. That's a rip-off.

[Diane]

Thank you for responding. I kept thinking that I was somehow thinking wrong on this. I will talk to my client and make sure that the extra payments are labeled as 'apply to principle'. Thank you again.

Diane