Need to Save Money? Here’s a Secret: Write Off Loan Interest
It can sometimes be a struggle to make those loan payments, so it’s nice when you have the opportunity to write off loan interest on your taxes. The trick is knowing what kinds of loan interest qualify for this type of tax deduction.
Writing Off Business Loan Interest
The interest you pay on business loans is generally a deductible expense. It doesn’t matter whether the interest you’re paying is related to a bank loan, an online loan, a line of credit, or business credit cards.
Any or all of these types of interest on business loans qualify–even if you used personal collateral to secure them. What matters is how the loan is being used, not how you got it. So, if you purchased something for your business with the loan funds, the interest is tax deductible as a business expense.
However, you must actually spend the money. You can only take the deduction after you have used the money on a business-related purchase. If the money you borrowed is in a bank account, you are not eligible to take the deduction. For this and other reasons, it’s a good idea not to borrow more than you actually need.
It’s also important to remember that the money you borrow for personal purchases is not tax deductible. As a business owner, you should try to avoid paying this kind of interest whenever possible. The wise choice if you need to borrow money is to use loans for business expenses only and use your business earnings to pay off personal debts.
Writing Off Car Loan Interest
When you use your car for business, you are allowed to deduct the interest you pay on your auto loan as a qualifying interest expense. It doesn’t matter whether you made deductions using the actual expense method or you take the standard mileage rate.
How much of your auto loan interest you can deduct depends on whether or not you use your car solely for business purposes. If you use it for personal reasons too, you can only deduct the business percentage. That means if you use your car for business 70% of the time, you can deduct 70% of the interest you pay on your taxes.
Writing Off Interest When Purchasing a Business
This is where things might get a little tricky. If you borrow money to purchase another business or a percentage of another business, we recommend getting professional advice from your accountant. There are a number of factors that affect whether your loan interest counts as a business or investment expense, and investment expenses are more limited. If you’re buying stock in a C corporation, it’s always the more limited type of investment expense.
Writing Off Interest on Loans from Family
If you’re claiming an interest deduction on a loan from a friend or relative that you’ve used for business purposes be aware that you must very carefully document all transactions related to the loan. For obvious reasons, loans from people you know raise more flags from the IRS than do those that are obtained through financial and lending institutions. Your loan documentation needs to prove that you actually paid the interest amount in question.
Interest You Can’t Deduct
There are several types of interest that are not tax deductible They include:
- Personal loans
- Overdue taxes, unless you’re a C corporation
- Prepaid interest payments made in the current year if you pay your taxes on a cash basis
- Money borrowed to pay taxes
- Interest paid to re-fund retirement loans
If you have any questions at all about what interest types are deductible, remember to consult with your business accountant.
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