Is business loan interest deductible? Get briefed on claiming this potential tax deduction
3 min read
September 08, 2021 • Block Advisors
Questions around loans and interest deductions are common for small business owners. In fact, we’re often asked, “Are small business loans tax deductible?”
Here’s the deal: the loan itself is not deductible, but the interest you pay on the loan is. Need to dig into the details? Keep on reading and we’ll outline what you need to know.
Want to simply get help claiming the deduction? Rely on Block Advisors for questions and help filing your small business taxes.
How writing off a loan to a business works
If, for example, you take out a $10,000 business loan in January with 8% interest over a five year period, you will pay approximately $2,100 in interest over the term of the loan, with about $750 of that paid in the first year. So, you can claim that $750 of interest as a tax deduction on your business tax return. Note that as you pay off the principal each year the interest will decrease.
According to the IRS, you are eligible to deduct business loan interest payments if:
- You are legally liable for the loan
- You and the lender have an agreement that you will pay off the debt
- Your relationship with the lender is truly a borrower-lender relationship
Basically, as long as your loan is from a recognized lender and has a legitimate repayment agreement that will result in the full repayment of the loan, you should be able to deduct loan interest payments from your taxes.
Business loan interest deduction eligibility
You are likely eligible to deduct business loan interest paid on most common types of business loans, granted:
The interest you claim must have been from funds used for business expenses only. If you use $3,000 of a $10,000 loan on a personal expense, but use the other $7,000 on business expenses, you are only able to deduct interest from the $7,000 repayment that was used for business expenses.
You are generally eligible to deduct only interest on borrowed funds that have been spent for business purposes, such as the purchase of equipment. Interest paid on the money while it is sitting unused in your account is usually treated as investment interest, which is deductible only against investment income.
Is credit card interest tax deductible on Schedule C?
If you’re using a credit card to make large purchases for your business, you may wonder if that interest is also something you can deduct. The good news is – you can! So, if you’ve bought equipment or supplies using your credit card, you may be accruing interest that can be deducted and reduce your business’ taxable income.
One important caveat if you use the same card for personal and business expenses – only the business-related purchase credit card interest is deductible on your Schedule C (or applicable tax form – see the next section). It’s a good idea to have separate credit cards for business and personal use.
Reporting interest paid on a business loan
You’re probably familiar with the 1040 form individuals use to file their income taxes, but depending on your business entity and the type of loan you’ve taken, you’ll report your deductions on the appropriate tax form, including the business loan interest deduction. These are the same forms you would use to report your income, gains, losses, and credits to the IRS, so you just need to make sure you’re accurately documenting your business loan interest as one of your deductions.
Here is a quick guide to the forms you’ll need to write off loan interest payments:
- Sole proprietors and single-member LLCs use a Schedule C (Form 1040)
- Partnerships and multi-member LLCs use a Form 1065
- Corporations use Form 1120 or Form 1120-S