There is no deduction for the repayment of principal on a loan. (Arguably there is an exception for ESOP loans.) What you have described is not a mere loan: it is a loan which might be characterized as either an adjustable interest element or as an equity kicker. The issue is whether the arrangement will be characterized as a loan or as a partnership. If it is characterized as a loan, then the borrower wil be entitled to deduct the entire amount of interest. If it is characterized as a partnership, then there will be no interest deduction. The analysis of the arrngement requires a review of the actual documents.