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Report: IRS Sets Rules On Interest Payments

July 3, 1987

NEW YORK (AP) _ The Internal Revenue Service has proposed regulations requiring taxpayers to keep detailed records in order to deduct interest paid on loans used for investments or business expenses, according to a report published Friday.

The proposed regulations would not apply to the deductibility of interest on home equity loans, regardless of how the loans are used, the New York Times reported in its Friday editions.

″A lot of people are going to set up separate accounts to use strictly for their investments,″ said Stephen Corrick, tax partner at Arthur Anderson & Co.

The new rules, which are scheduled to go into effect in 60 days after public hearings, would require individuals and businesses to maintain meticulous records tracing how they spend any borrowed money in order for interest charges to be deductible.

Deductibility would depend on the use of the borrowed funds, rather than the source, the Times said.

Most interest expenses incurred on loans used for consumer purchases, business expenses, investments on housing had been deductible automatically.

But the new tax law, which went into effect Jan. 1, took away some tax breaks. For instance, deductions for credit card interest and other interest paid on borrowings for cars and other merchandise will be phased out over five years. The law also says interest deductions on loans for investments could not exceed an individual’s total investment income in any one year.

″There was a big question left to the IRS by Congress - whether interest would be categorized based upon the origin of the loan or the actual use of the money,″ said David Green, a tax manager at Touche Ross & Co. ″Now they have clarified that and it’s based upon how you use the money.″

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