Ruling on Disallowance of Interest Expense on Loans

November 20, 1981 BIR RULING NO. 237-81 30-b 3-A 000-00 237-81 The Regional Director Revenue Region No. 6-A Iloilo City S i r : This refers to your letter dated July 31, 1981, requesting resolution of the following queries bearing on the disallowance of interest expense on loans: 1. If no principal is amortized or paid during the year, as therefore all payments on the loan for the current year are applied on the interests that have accrued up to the time of payment, will no amount of such interest paid be allowed as deduction at all? 2. If the payment on the loan is applied partly on the principal or a portion thereof and partly on the interest, will it be correct to allow as deduction that portion of the payment which equals the principal paid or amortized multiplied by the rate of interest and further multiplied by the number of years or period from the date the loan was granted up to the current date of payment? In reply thereto, please be informed as follows: 1. Section 30(b)(3)(A), as amended by P.D. No. 1457, provides that if an individual taxpayer reporting income on the cash basis incurs an indebtedness on which the interest is paid in advance through discount or otherwise, such interest is deductible only in the year the indebtedness is paid. Under your first query, the interest was considered as having been paid in advance; hence, the amount of such interest paid shall be allowed as deduction only in the taxable year when the indebtedness has been fully paid. Therefore, if the principal is not yet paid during the taxable year although the interest on the said principal is already paid, no interest expense shall be allowed as deduction at all. cdtech 2. Section 30(b)(3)(A) of the Tax Code, as amended by P.D. No. 1457, also provides that if said indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of principal amortized or paid during the taxable year shall be allowed as deduction in such taxable year. It means, therefore, that in case of periodic amortizations, the actual interest paid corresponding to the portion of the total principal paid during a taxable year shall be deductible as interest expense for that taxable year. Very truly yours, RUBEN B. ANCHETA Acting Commissioner