Prepaid interest is the interest paid in advance before it is earned, often seen in loan agreements and mortgage practices. Generally, prepaid interest is not tax deductible, except for the customary points paid by a borrower on the initial mortgage to purchase a principal residence.
Unearned interest refers to interest that has been collected on a loan but cannot yet be counted as book earnings. This situation typically occurs with prepaid interest, which is taxable upon receipt by both cash and accrual basis taxpayers.
