Physician practice loan consolidation and deducting interest expense

Recently received the following question:

I am a physician who has a proposal from a bank to borrow $100k.  The loan is primarily to consolidate some personal debt, but the bank has said they will disburse the funds to my physician corporation under “practice name, M.D., Inc.” and therefore they consider it a commercial transaction and the interest is deductible.  Do you know of any circumstance where this interest would be deductible?

Interest deduction limits require allocation of interest expense.

For certain taxpayers where the proceeds of a single debt are used for multiple purposes—e.g., to make investments and to buy “personal” items—the debt must be allocated among the various expenditures. This is per IRS regulations.

Interest expense is allocated the same way as the debt with respect to which the interest accrues, by tracing disbursements of the debt proceeds to specific expenditures.  Except for qualified residence interest, the nature of any property securing the debt isn’t relevant.

The interest, as allocated, is subject to the appropriate deduction limit, as follows:

… Interest allocated to a passive activity expenditure (current or former) is subject to the passive activity limitations.

… Interest allocated to an investment expenditure is subject to the investment interest limitations.

… Interest allocated to a personal expenditure is treated as personal interest (i.e., it’s not deductible).

… Interest allocated to a trade or business expenditure is treated as trade or business interest (i.e., it’s not subject to the personal or investment interest limits).

The interest expense allocation rules don’t control the allocation of interest for any purpose other than those listed above