Mortgage brokers - allowable deductions

No deductions are allowed for the costs of doing business (for example, amounts paid to independent contractors). However, certain income may be deducted including:

Bad debts: amounts previously reported and determined to be uncollectible. These amounts must also be written off for IRS purposes.

Cash and trade discounts: may be deducted from the gross proceeds of sales if the amount was previously reported. Discounts are typically used as incentives for early payment.

Interest on certain investments, loans, and/or obligations: interest received on investments and loans primarily secured by first mortgages or trust deeds on nontransient residential properties. This deduction is only available when all of the following conditions are met:

• Taxpayer is engaged in banking, loan, security, or other financial business;
• Amount deducted is from interest received, meaning:
  • It is an obligation of the debtor to pay the creditor;
  • Debtor must have made the payment or it was made on his behalf; and
  • Payment must not be for specific services such as a finder’s fee, document preparation, title examination fees, notary fees, etc.
• Amount deducted received because of a loan or investment (owner of a loan or investment is the person who retains the risk of interest rate fluctuations);
• Loan is primarily secured by a first mortgage or deed of trust; and
• First mortgage or deed of trust is for nontransient real property.

Only lending brokers qualify for this deduction and it is limited to the net loan origination fee and actual interest paid on the loan.

The following interest/fees do not qualify for the deduction:

• Interest on equity lines of credit that are subordinate to another loan.
• Interest on second mortgages.

Taxpayers are responsible for maintaining their books and records to support any claimed deductions. If taxpayers are unable to provide supporting documentation, they are not entitled to the deduction.

Apportionment

Mortgage brokers that conduct business both inside and outside of Washington must apportion their income between Washington and elsewhere.

Lending mortgage brokers are to apportion based on WAC 458-20-19404 for their income from lending.

Other mortgage brokers are to apportion their income under WAC 458-20-19402. For periods prior to June 1, 2010, these mortgage brokers should refer to WAC 458-20-194.