Although I haven't found where New York law

Although I haven't found where New York law specifically treats a prepayment penalty as interest it appears the IRS does at least for real estate. I would think these toxic loans should be treated no different. When the prepayment penalty's are added to the interest it means no company is ever given a chance at any time during the length of these loans to pay them off at a rate that's not criminally usurious.



TAX TREATMENT OF BUSINESS LOAN PREPAYMENT PENALTIES
Posted on June 17 2014 by admin

If you’re a business owner and you have a mortgage loan on some real estate, and find yourself in a situation where you have the desire and wherewithal to pay off the loan early, how do you treat any prepayment penalties that may apply? Well first, you want to be sure you know exactly what the penalty will be beforehand and if it still makes sense to pay off the loan given the amount of the penalty. Details on how the penalty is calculated should be contained within the original loan agreement. But don’t rule out trying to negotiate that penalty down either.

So the first question is: can you deduct the penalty as a business expense? As many of us know, there are certain types of penalties that are non-deductible. In this case the answer is yes, they are deductible. The IRS considers the penalties paid to the lender are for the privilege of using the lender’s money for a shorter period of time than that for which they originally borrowed the funds and constituted, for all practical purposes, an additional interest charge for the use of such money for such a shorter period. The amount is treated as additional interest expense.