Are business loan payments tax deductible?

As a small business owner, you work hard for every dollar. So it pays to be astute about what tax deductions you can take for your business loan.

In broad terms, you can currently deduct the interest you pay or accrue on debts during the tax year related to your business. It doesn’t matter if the interest is paid on a bank loan, credit card, line of credit, car loan, or real estate mortgage. Additionally, if a personal loan is used for business expenses, the interest is also tax deductible. You can deduct interest on a business loan regardless of whether you use business or personal property for collateral.

Here are the requirements to deduct interest on a business loan, according to the Internal Revenue Service web site:

  • You must be legally liable for that debt. Make sure you have paperwork for this transaction, such as UCC-1 financing statement that a creditor files to give notice that it has an interest in the personal property of a debtor
  • Both you and the lender intend that the debt be repaid. You should have proof you are making payments and that the lender is depositing the monies.
  • You and the lender have a true debtor-creditor relationship. It’s beneficial to have paperwork that details the relationship.

What’s not deductible is the principal repayment amount. That’s because the borrowed funds are not considered income for the business since it is not earned. The principal repayment is simply paying back the money.

You should also be aware that the deduction only starts when you spend the borrowed monies for business purposes. If you just put the money in the bank, you can’t deduct the interest since that is considered an investment. But you may be able to deduct the interest paid on the money as an investment expense. Please note, you should consult a tax expert to ensure you meet the qualifications for that type of deduction.

Some qualifiers

For loans that are used for both business and personal expenses, you must divide the interest between the personal part and the business part and then only include the business portion on your business tax forms.

For example, if you use your car only for business, you can deduct all paid interest for that year. But if you drive it for both personal and business reasons you should only deduct the percentage of business use. So if you use your car 70% of the time for business and 30% for personal purposes, then you would deduct 70% of the interest for the car loan.

What’s not deductible?

The following is a list of some interest expenses for a business loan that are generally not tax deductible:

  • Interest on loans for overdue taxes or tax penalties (only C-Corporations can deduct this interest)
  • Interest for loans to pay taxes or fund retirement plans
  • Interest for loans of more than $50,000 that are borrowed on a life insurance policy for business owner(s) or employees

For more detailed information about deducting interest on business loans and other information on business deductions, see IRS Publication 535.