ALLOWABLE DEDUCTIONS

ITEMIZED DEDUCTIONS- INTEREST

INTEREST

 is the cost of using or borrowing someone’s money.

- The amount that if we are the borrower we pay of the excess of the principal amount that
we owe from the lender
 On the lenders part, it is an income, a return for using his money lent to someone
 On the borrowers part, it is an expense or cost for using someone’s fund over a period of time.
- This interest is not assume this is agreed upon the lender and the borrower under the
contract of loan
 Interest could be computed using the simple interest method, or the amortization method
(effective interest method)

General Rule:

 The amount of interest paid or incurred within a taxable year on indebtedness in connection
with the taxpayers profession, trade or business shall be allowed as deduction from gross
income.
 Provided, however, that the taxpayer’s allowable deduction for interest expense shall be
reduced by the 33% of the interest income subjected to final tax.
- Before an interest can be deducted from our gross income always remember that are some
interest expense which are subject to the limits and this 33% if the taxpayer incurred
interest expense and in the other hand also earned interest income which are subjected to
final tax like the interest income from bank deposits or the interest income from currency
deposits this interest income from those deposits where subject to final tax.