TaxProTalk.com

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.

1.263(a)-4(c)(1)(ii) specifically identifies debt instruments. That's regarding acquiring debt, i.e., becoming the creditor, not the debtor.

What kind f loan was incurred? Personal, business, residence, investment, etc.?

Oh I see. Thanks for clarifying that. It was a business loan.

So now how will you treat the costs?

I think that the loan costs would qualify as de minimis costs and should be expensed under 1.263(a)-4(e)(4)(iii)(A). The reason being that those loan costs were for pursuing a business loan.

I think you're in the wrong reg.

Are you saying that 1.263(a)-4(e)(4)(iii)(A) doesn't apply? Or do you mean that loan costs is actually a created intangible and it is 1.263(a)-4(d)(2)(I)(B)?

Wrong reg section.

Section 1.263(a)-5(a)(9) provides that costs to facillitate a borrowing must be capitalized. Then look at section 1.263(a)-5(d)(3) to see if the costs are de minimis.

Coddington wrote:Wrong reg section.

Section 1.263(a)-5(a)(9) provides that costs to facillitate a borrowing must be capitalized. Then look at section 1.263(a)-5(d)(3) to see if the costs are de minimis.

Thank you very much. This is why I love this forum.

Coddington wrote:Section 1.263(a)-5(a)(9) provides that costs to facillitate a borrowing must be capitalized. Then look at section 1.263(a)-5(d)(3) to see if the costs are de minimis.

Does the 5(d)(3) de minimis exception fully cover debt issuance costs within the context of section 263, or could they still be capitalized under some other rationale?

For example, I have a client who paid to open a business line of credit, and the first borrowing didn't occur until the following taxable year. Would deduction of the fee be postponed until the client benefits from it?

Chay, what would that other rationale be? Is this is an ongoing business or one that has not yet started? I think that reg. allows the de minimis costs to be deducted in the year paid or incurred.

I was thinking something along the lines of a prepaid expense. You can't deduct those until the benefit from the expenditure is actually received. It seems like there should be some overlap between this part of the capitalization Regs (and other parts I may not be aware of) and the various de minimis rules such as the one we're discussing, but I'm not sure.

I haven't looked at this question before, so it is possible there is authority on point. At a glance, -5(d)(1) says that de minimis costs are treated as nonfacilitative. Much like inventory treated as non-incidental materials and supplies, I would infer that "treated" means exactly that. They are treated as nonfacilitative, notwithstanding that they are, in fact, facilitative. Since they are facilitative, they are not, in the normal sense of the word, "expenses". "Expensing" also tends to be a book concept, so I'd look at how it would be classified for GAAP purposes.

1.446-5 says debt issuance costs that are required to be capitalized under 1.263(a)-5 are to be deducted over the term of the debt. 1.263(a)-5(d)(1) says that de minimis costs are not facilitative costs. I think that gets us to deducting in the year paid or incurred.

Coddington posted as I wrote this, so I'll take another look.

Brian, treating them as nonfacilitative means, to me, saying thet do not need to be capitalized. There is no doubt they are "expenses". The question is when can they be deducted. I say when paid or incurred. Why let GAAP control?

I think I may have answered my own question. The prepaid expense rule doesn't apply because of the following:

An amount paid to facilitate a borrowing does not facilitate an acquisition or creation of an intangible described in paragraphs (b)(1)(i) through (iv) of this section.

(Regs. 1.263(a)-4(e)(1)(iv))

For purposes of this section, employee compensation (within the meaning of paragraph (d)(2) of this section), overhead, and de minimis costs (within the meaning of paragraph (d)(3) of this section) are treated as amounts that do not facilitate a transaction described in paragraph (a) of this section.

(Regs. 1.263(a)-5(d)(1))

The de minimis exception treats the costs as not facilitative only for purposes of the (a)-5 Regs, so they are still facilitative of a borrowing for purposes of the (a)-4 Regs, which say they don't apply to that type of cost. The tangible property capitalization Regs certainly don't apply, which must mean the fees escape section 263 altogether. Right?

But I guess there's still a question of whether there is some deeper expense matching or clear reflection of income principle that would prevent deduction until the following year.

There is no deeper principle. The INDOPCO regs turned that Supreme Court case on its head. Absent another Code section intervening, we went from a presumption of capitalization to it's-only-capitalized-if-the-regs-say-it-is.

Section 1.263(a)-4(e)(1)(iv) doesn't actually answer the question if Len's reading stands. If a de minimis cost does not facillitate a borrowing, then it can still be prepaid. If it is merely treated as not facilitating the borrowing even though its character remains facilitative, then it could not be a prepaid.

Coddington wrote:If it is merely treated as not facilitating the borrowing even though its character remains facilitative, then it could not be a prepaid.

That's where I landed based on the language "for purposes of this section." 1.263(a)-4 is a separate section from 1.263(a)-5, right?

Yeah, sorry. That's what I get for reading posts here as quickly as I do on other, non-tax boards.

Would deduction of the fee be postponed until the client benefits from it?. Come to think of it, doesn't one benefit from having paid to open a business line of credit, and the first borrowing didn't occur until the following taxable year.. Without the LOC, maybe the business could not have moved forward with its plans to spend.