Discussion:SE Tax - a puzzle...

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($400,000 at 6% b)
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Michael}} Michael}}
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 +{{ForumReplyPost|UserID=Jdugancpa|Date=28 April 2009|Text=$400,000 at 6% borrowed 6/30/08, interest paid monthly on last day of each month, no principal paid. Total interest paid = $400,000 X 3% = $12,000. Earnings of Sch C before the interest deduction $500,000. Tax reduction attributable to borrowings = $12,000 X 92.35% X 2.9% = $321.38
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 +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.}}

Revision as of 04:51, 28 April 2009

Discussion Forum Index --> Basic Tax Questions --> SE Tax - a puzzle...
Discussion Forum Index --> Tax Questions --> SE Tax - a puzzle...

Harry Boscoe (talk|edits) said:

27 April 2009
Facts: The taxpayer's principal residence is "free-and-clear" - there's no mortgage on it. This home is worth enough in the market that the value of the property will not be a concern in the course of this discussion. The taxpayer uses this home as security and borrows $400,000 which he immediately spends, buying backhoes for his very successful Schedule C ditch digging business.

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.]

RoyDaleOne (talk|edits) said:

27 April 2009
All.

Death&Taxes (talk|edits) said:

27 April 2009
What is it with backhoes, Harry? Did one in your past bury a few cases of PBR? Why not front end loaders?

Agree with Roy.

Harry Boscoe (talk|edits) said:

27 April 2009
Apologetically: I think neither of you read the question. It asks how much will this taxpayer's SE tax go down because of the interest he's paying...

Harry Boscoe (talk|edits) said:

27 April 2009
Omigosh! I just realized that there's probably tax-prep software package users out there that think this question is really a no-brainer. This isn't a challenge that your "box" should be asked to attack. Unless, of course, you want to share what "the box" gets for an answer...

Brock And Associates (talk|edits) said:

28 April 2009
Okay, I will take a stab at this...hopefully I don't embarrass myself.


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

Jdugancpa (talk|edits) said:

28 April 2009
$400,000 at 6% borrowed 6/30/08, interest paid monthly on last day of each month, no principal paid. Total interest paid = $400,000 X 3% = $12,000. Earnings of Sch C before the interest deduction $500,000. Tax reduction attributable to borrowings = $12,000 X 92.35% X 2.9% = $321.38

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.

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