Lesson: Prepaid Interest

In this lesson, Nick Palazzolo, CPA, breaks down the intricacies of dealing with prepaid interest in the context of taxes. He clearly defines what prepaid interest is and walks through its tax deductibility rules, emphasizing that interest expenses must be deducted in the tax year to which they are allocable, not necessarily when they are paid. Through the use of an example with a small business owner named John, he illustrates the practical application of these rules, showing that despite prepaying interest for a loan, the deduction is restricted to the interest that accrues each year. Nick communicates these concepts with a dash of humor while detailing the rationale behind the IRS's stance on limiting deductions, ensuring the information is both accessible and memorable.