Welcome to Part 5 of our blog series on deductible business expenses. If you missed the first four installments, you can catch up below:
What is business interest expense?
Business interest expense includes interest paid on a loan used for business purposes. Deducting this interest reduces the cost of borrowing funds for your business.
Interest paid on personal loans is not tax deductible; if a loan was used for both business and personal purposes, you may only deduct the interest paid on the portion of the loan used for your business.
My business borrowed money to use for investment purposes. Can I deduct the interest paid on the loan?
Business owners generally may deduct some or all interest paid or accrued during the tax year on business-related debts. If you use the proceeds of a loan for a business expense, regardless of what type of property secures the loan, you may be able to deduct interest on the debt if you meet the following requirements:
You are legally liable for the debt.
Both you and the lender intend for the debt to be repaid.
You and the lender have a true debtor-creditor relationship.
In order to deduct loan interest as a business expense, the loan must be used to pay for business expenses or to purchase assets for the business. If a loan is used partially for non-business expenses, the amount of deductible interest must be reduced proportionally.
For example, if you were to spend 80% of a loan on a new piece of machinery for your business, and the other 20% on personal purchases, only 80% of the interest paid on the loan would be tax-deductible. 20% of the interest would be considered non-deductible personal interest.
When taking out a business loan, be sure to file away relevant paperwork in a safe place. You may need to provide documentation of the initial loan transaction and debtor-creditor relationship, as well as proof that you are making payments to the lender.
I use my personal car for work purposes. Can I deduct the interest on my car loan as a business expense?
Yes, but only some of it. To calculate how much interest you may deduct from a personal car loan, you’ll first need to calculate what percentage of its use is for business purposes.
For example, if you use your car for business purposes only 10% of the time, you may only deduct 10% of the loan interest as a business expense.
I run a business from my home. Can I write off my home mortgage interest?
Possibly! If you are self-employed and meet the criteria for the home office deduction, you may be eligible to deduct a portion of your mortgage interest as an indirect business expense. The amount that you may deduct is based on the percentage of your home used for business purposes.
I use a credit card for business purposes. Can I deduct the credit card interest as a business expense?
Probably. Taxpayers are generally prohibited from deducting personal credit card interest. However, if you use a personal credit card to pay for business expenses, a portion of the interest may be tax-deductible.
If you are eligible to deduct credit card interest from your business earnings, you may only deduct the interest on payments for qualifying business expenses. If you use a credit card for both business and personal purposes, be careful when calculating your deductions!
Are there limitations to business interest expense deductions?
Yes, for certain taxpayers. Some business owners may only be eligible to deduct part of their business interest expenses. Your CPA can help you determine whether these deduction limitations apply to you.
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