When it comes to your taxes, interest is a deductible expense for your business. This is great news for those business owners who have taken out a loan to grow the business with interest added on top. However, it is important to note that there are limitations and restrictions as to how these deductions can be applied depending on how business loans are used.
A business interest expense is the cost of interest on a business loan used to maintain business operations or to pay for business expenses. Its purpose is the ability for the expense to be deductible. In order for the loan interest to be deductible, the loan needs to be used to pay for business expenses or to purchase business assets. In the case that any portion of the loan is used for nonbusiness purposes, the amount of the deductible interest from the loan must be reduced.
What to Know About Business Loan Interest Deductions
In order to be eligible for the business loan interest deduction, there are some criteria you must meet as defined by the IRS.
The funds you have must be used for business purposes and not just sit in your bank account. If the funds just sit in your bank account, they will not be eligible for a deduction. You can deduct any interest accrued and paid during the fiscal year as long as you are liable for the debt. To qualify, the paperwork on file needs to be in your name and show the terms you report. Additionally, you must make regular payments and the relationship between you and the lenders must be legitimate.
When Business Interest is Not Tax Deductible
How Business Loans Affect Tax Deductions
No matter what kind of business loan you have, the interest can be deducted. There are four common loan types that allow you to get a tax deduction.
When Is Interest Not Tax Deductible?
There are a couple cases where interest on business loans is not tax deductible. If you pay off a loan to the original lender with the funds from a second loan is not a business expense. This means the interest you are paying to the first lender is not tax deductible. You can deduct the interest again once you start to pay off the new loan.
The points and loan origination fees are not considered business expenses and cannot be deducted. The costs must be added to the value of the property and deducted over time with asset depreciation.
Interest for loans to pay taxes or fund retirement plans and interest for loans of more than $50,000 that are borrowed on a life insurance policy for business owners or employees.
The Bottom Line
If your loan is being used for business purposes, the interest will be tax deductible but in some certain situations it is not deductible. If you still have questions about business loan payments being tax deductible, consult with a tax professional to help you answer your questions and ensure that you maximize a business loan interest deduction and save money.