Navigating Financial Challenges: A Case Study Example on Loan Interest Deduction Strategies for Sarah

Introduction

This study is based on the case analysis and evaluation of an individual known as Sarah Stevens, who lives in Melbourne. Sarah is an accomplished chef and has a new café. She borrowed $125, 000 from the bank in early 2018 in January 2018 to finance her new café. In March 2018, Sarah decided to open her new café in Melbourne. The café failed to pick up and was making a gradual profit where she managed to pay $ 50,000 of the capital of the loan. However, her business continued to worsen, especially after the café was prevented from opening due to the Covid-19 pandemic's spread. Hence, some restrictions were imposed, which prevented people from accessing the café. Due to these restrictions, Sarah was forced to provide takeaway meals and coffee since she had to search for money and repay her loan. However, this did not last for long, and she was forced to close her business following the lockdown in Melbourne. This means that Sarah was to find an alternative method to raise money that she could use to repay her loan. Therefore, she decided to sell her furniture and fittings, particularly the kitchen equipment, which helped her to pay down some of the loans. At this time, she was able to repay the loan and remained with an arrears of $ 60,000 before she quit the business. Later, Sarah obtained a job in an unrelated field where she calculated and found that it would take her five years to pay off the loan fully. This paper tends to advise and give recommendations on how Sarah can deduct the interest from the loan within five years.

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Case Analysis of Sarah

The case study is based on a person named Sarah who wishes to deduct her interest loan of $60, 000 within five years. The loan interest deduction is a very common itemized deduction that permits a person to deduct the interest they pay on any loan. This implies that in the case of Sarah, it is possible to deduct her interest of $60, 000 within five years. The loan can be deducted from her annual taxes, thus helping to reduce her taxable income for the year. It is possible to write off the annual interest one is paying on the business loan. This implies that a person is also permitted by the business loan interest deduction to make a deduction of the amount one paid in the business loan interest, particularly from his or her tax liability. Bearing in mind that Sarah's business has been affected by the COVID-19 pandemic, she can write off her remaining loan balance payments. This will help her pay off the remaining loan balances without any interest within five years.

However, for Sarah to be able to deduct her interest, she must meet various criteria. This means that she must be legally liable for the payment of her loan, and also, the bank must agree that she intends to pay off her debt of $60,000. Additionally, the two parties involved must have a true debtor-creditor relationship, which implies that Sarah is trusted by the bank and can adhere to the loan payment procedures. It also implies that for a person to write off loan interest deduction to the bank, the loan acquired must be a legitimate loan and from a legitimate lender. Therefore, a person cannot borrow money from friends he or she may or may not fully repay and also make a deduction of your interest payments to the. However, this does not mean that a person is limited from borrowing loans from friends or family, but one needs to keep in mind that these parties are not considered real leaders.

For any party to qualify for a loan interest deduction, they should have spent the loan on business. Nevertheless, suppose your loan sits in your bank account. In that case, the bank considers this as an investment but not an expense even if the person is paying the loan principal and its interest. This means that Sarah qualifies for an interest deduction since her loan was used for business purposes. If the bank deducts Sarah's interest loan of $60,000, her tax burden is lowered, thus making her repayment for the remaining loan easier within five years in her new job. This will lower the pressure of paying the loan, especially at this time; the economy has deteriorated due to the COVID-19 pandemic. According to Australian Law, it is possible to withdraw interest tax on a loan. Therefore, the Law implies that the bank can withhold or deduct any amount of loan paid, as stated under clause 2.3. However, the Law implies that the amount does not exceed 10% of the interest payment. The Australian Law suggests that the borrower is entitled to an interest withdrawal or deduction for a particular amount without having to pay to the Agent for the account of the creditor. The Australian Law states that the borrower within the timeframes, as established by the applicable Law, pays the interest deducted to the Australian Government Agency. The borrower gives the Agent a payment receipt that entitles one to the deduction of the interest for the payment to the Australian Government Agent. Therefore, Sarah's loan interest of $60,000 is deductible according to section 8 of the Australian Law, which means she will be able to pay off the remaining loan within five years at no interest.

Conclusion

From the discussion above, this case study is based on a person named Sarah who wishes to deduct her interest loan of $60, 000 within five years. As established, the loan interest deduction is a very common itemized deduction that permits a person to deduct the interest they pay on any loan. Therefore, this means that in the case of Sarah, it is possible to deduct her interest of $60, 000 within five years. According to Australian Law, it is possible to withdraw interest tax on a loan. Moreover, the Law implies that the bank can withhold or deduct any amount of loan paid, as stated under clause 2.3. The Law also means that if the amount does not exceed 10% of the interest payment. The Australian Law suggests that the borrower is entitled to an interest withdrawal or deduction for a particular amount without having to pay the Agent for the account of the creditor. Hence, Sarah's loan interest of $60,000 is deductible as contained in section 8 of the Australian Law, thus meaning that Sarah will be able to pay off the remaining loan within five years at no interest.

Advice Letter

Dear Sarah,

I am writing to you to advise on how your expenses can be treated for tax purposes. Having in mind that your business was prevented from opening due to the COVID-19 pandemic, it is, however, your obligation to repay your loan arrears. Therefore, I would recommend and advise you to apply for a loan interest deduction since you are permitted to do so according to Australian Law. In this regard, you will be able to repay your loan within five years without incurring any interest rate for the remaining $60,000, bearing in mind that you have secured a new job in an unrelated field.

According to Australian Law, your loan is deductible, as stated in section 8 of this Law. Additionally, the Law suggests that for you to qualify for a loan interest deduction, you should have spent your loan on business expenses only. However, the amount that can be deducted should not exceed 10% of the interest payment. As the Law suggests, the bank can withhold or deduct any amount of the loan as stated in clause 2.3. It is also good to note that interest, which is paid on a personal car loan, personal loans, and credit card, is not tax-deductible. Nevertheless, it is good to know that a person claims the interest you have paid when you file your taxes. However, in your case, all loan expenses can be treated for tax purposes.

Bibliography

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"Comparative Case Study: Housing Policy and Tax Law." Our Selfish Tax Laws, 2018. DOI:10.7551/mitpress/10982.003.0004.