1. Acquaint with the pertinent provisions of loan contracts, mortgage agreements, certificates of indebtedness, financing arrangements and consider possible adjustment areas as follows:
    1. determination of expenses, (e.g. interest and bank charges);

    2. refunding of debt; and

    3. legal, professional and other expenses of issuance.

  2. Scrutinize any long-term outstanding liability to the owner, shareholders, officers or to a related taxpayer as this may constitute accumulated unreported income.
  3. When the liability is secured by property pledged or mortgaged as collateral for the loan, determine if the property pledged/mortgaged is income producing.
  4. Verify if funds were borrowed for use of affiliates as the interest expenses thereon shall not be deductible on the part of the borrowing taxpayer.
  5. Determine whether the indebtedness will give rise to interest expense that are subject to limitations on deducibility under Section 34(B) of the Tax Code. Determine if loans were borrowed to finance acquisition of tax- exempt securities. If so, the interest expense is not considered deductible for income tax purposes.


Reference: RAMO 1-2000

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