Making loan payments can sometimes be a struggle, but it does have its perks. You can write off the loan interest you’ve paid over the year on your taxes. Below are the types of loans for which you can write off the interest payments when it comes time to file your taxes.
Business Loan Interest
The interest paid on business loans is generally an expense you can deduct. This can be for interest which is paid on a business credit card, a bank loan, alternative financing loan, line of credit, or online loan.
Even if you used personal collateral to secure any of the above types of business loans, they can still qualify to be written off. The important thing to note is how the loan is being used, not exactly how you received the loan. As long as you purchased something for the business with the funds, the interest is tax deductible as a business expense.
The only caveat is that the money borrowed must have actually been spent. It cannot be sitting in a bank account, unused. If you take out too high of a loan and don’t spend it all, you can only use the interest paid on the used loan funds as tax deductible as a business expense.
Loans taken for personal purchases are not tax deductible. A wise choice, if you need to borrow money, would be to use loans for business expenses only. You could use the earnings you’re your business to pay off personal debts.
Car Loan Interest
If you have a company vehicle, you are allowed to deduct the interest you pay on your auto loan as well. You can make deductions using the actual expense method, or you could even take the standard mileage rate.
You can also deduct the interest paid on a personal car, as long as you use the personal car for business purposes as well. The difference here is how much of your auto loan interest you can deduct. This varies based on how much you use the car for business related activities. You can only deduct the amount proportionally to how much the vehicle is used for business matters. For example, if you have a personal car that you use for business 50% of the time, you can deduct 50% of the interest you pay on your taxes.
Interest When Purchasing a Business
Deducting interest paid from purchasing a business can get tricky, so we suggest seeking professional advice from your account. There are ways that interest paid on a loan to purchase a business can be written off, but it changes based on whether or not the business purchase is considered and investment or a business expense.
Interest on Loans from Family
If you’ve borrowed money from a friend or family member for business purchases, it can be possible to write off the interest paid on this loan. The most important thing when claiming an interest deduction on a loan from a family member is to make sure all transactions are very clearly documented. Taking loans from someone you know usually raises more flags from the. Your loan documentation and records needs to prove that you actually paid the interest amount.
Interest You Cannot Deduct
Some interest payments that are not tax deductible are:
- Overdue taxes, unless you’re a C corporation
- Personal loans
- Money borrowed to pay taxes
- Interest paid to re-fund retirement loans
If you have any questions, it’s always wise to seek financial advice from a business accountant.