Discussion:SE Tax - a puzzle...

How much will the interest paid by the taxpayer on the backhoe purchase reduce his SE tax?

[Make whatever assumptions you want, consistent with the given facts. Show your work.]

Agree with Roy.

I found these computations in Publicaton 936 and used table 1 to figure all of this out.

Assumptions:

I will assume that this guy has no other loans of note, in other words no grandfathered debt to consider.

This guy used 100% of the secured loan amount to purchase the machines (no mixed use in this case).

TABLE 1 Lines 1-8 (determines the qualified loan limit):

This guy will have a qualified loan limit of $500,000 (line 4 of table 1 is $1,000,000, line 5 is $400,000, line 6 is $400,000, line 7 is $100,000, line 8 is $500,000 [sum of line 6 and line 7]).

Table 1 line 9 (determines average loan balance on qualified homes):

This guy will have a average balance of loans on his qualified residence of sub $400,000 based on his payment schedule and the time of the year the loan was secured. Assuming Jan 1 as day 1 of the loan and Dec 31 as the last day of the loan in tax year 2008 and he didn't prepay more than one month's principal during the year, his average balance will be within a couple few dollars of $400,000. In no case will it be more than $500,000 the threshold for moving a portion of the home mortgage interest from schedule A to Schedule C as a business expense.

Because his qualified loan limit is greater than the average loan balances on his qualified residence, all of his interest is deductible as mortgage interest on schedule A. None of his interest will flow through to schedule C and ultimately Schedule SE unless he has a qualified home office. If he has a qualified home office, his net self-employment income will be reduced by .1412955 cents for every dollar of mortgage interest (flow through to SE of the reduction in net self-employment income by the Form 8829 mortgage interest x .9235 x .153). If he has no home office, his net Self-employment income and tax isn't impacted either way by this Schedule A mortgage interest.

It's late and this makes perfect sense. Maybe I will wake up refreshed tomorrow and make fun of myself for this answer but I believe this to be correct.

Michael

Or, assume his Sch C earnings before interest are $100,000. Then the savings will be $12,000 X 92.35% X 15.3% = $1695.55.

Since the mortgage interest qualifies as home equity debt instead of acquisition debt and was all used in business, it is deductible on Schedule C.

Jdudancpa has it right as best I can tell using his/her assumptions.

Michael

All the interest should be fully [whatever does that word do in here?] deductible as business interest on Schedule C and on Schedule SE. Even though the interest is being paid on a "home equity debt".

Looks like the "election" to treat a home mortgage as "unsecured" debt doesn't even appear on the horizon here. Is the guy/gal with the IRS agent with the Schedule C interest denial still here? CaxTax1 or AlfTax1 or CafTax1 or whoever....

Have you got any further info from Our Gummint about how *they* think the "(o)(5) election" works?