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Why Your Small Business Loan Interest Is Tax Deductible

Growth and Operations

Why Your Small Business Loan Interest Is Tax Deductible

Updated: Apr 3, 2020

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With your accountant chasing old expense receipts and your bookkeeping in dire need of an update, the looming tax deadline is creeping closer and will be here before you know it.

The good news is that there are likely many tax deductions you can take advantage of that you didn’t previously know about. For instance, many business owners don’t realize that the interest they pay on small business loans is tax-deductible.

Let’s take a look at this business loan tax deduction specifically. Understanding this deductible can make your tax season a little easier to bear.

Are Business Loans Tax Deductible?

How can you be sure the interest you’re dutifully paying can be written off? All you need to ask yourself is: Do I use the funds exclusively for my business? 

If the answer is yes, the interest you pay to receive that loan principal is a 100 percent deductible business expense. When you ask the question, ”is interest on a business loan tax deductible?” it’s how you use the money that counts!

If you’ve taken out a loan for equipment financing or inventory financing, you can deduct the interest you pay on both types of loans. As long as it’s a legitimate business expense, then you can claim it as a tax deduction. 

But, don’t forget the small print. Your business loan interest tax deduction generally begins when you start to spend the borrowed funds to grow your business. If you’re holding onto your funds for a later date, you may not be able to deduct interest upon that sum ’til you use it.

Items You Can’t File as Business Loan Interest Tax Deductions

Let’s review the answer to the question: Is interest on a business loan tax deductible? You can’t deduct interest on:

  • Loans you aren’t legally liable for.
  • Loans used for personal expenses —like that new pair of Beats headphones you want so badly
  • Debts your business doesn’t owe — sorry, but your daughter’s Cal tuition doesn’t count. Go Bears!
  • Loans from family or friends: Technically, the interest on these loans is tax-deductible but the IRS will be very suspicious. Make sure you document these kinds of loans carefully or you may put yourself at risk of an audit. 
  • Overdue taxes (unless you’re a C corporation)
  • Your mortgage for your office or storefront. Talk to your accountant about how you can deduct those costs over time with depreciation

Other Tax Deductions to Keep in Mind

Besides business loan interest deductions, what other common tax deductibles could your small business be eligible for?

Car Expenses

Uncle Sam lets you deduct car expenses related to your business. You can pick from two methods (Standard and Actual), so try both of them and see which one gives you a larger deduction! Hint: commuting doesn’t count, but driving to a trade show or client’s office is up for grabs.

Home Office Expenses

Work from home? Forget the old standard method that requires you to calculate a million different figures you don’t have time to track. Use this simplified formula from the IRS for your home office deduction instead: $5 per square feet of the area used exclusively for business (with a maximum of 300 square feet).

Legal Fees and Tax Advice

Still on the fence about hiring a lawyer and accountant? Legal and tax advice is also fully tax-deductible for every business type (corporations, LLCs, partnerships and even proprietorships), so now’s the time to make your business as compliant as possible.

Work With a Tax Professional to Ensure You Get the Most Out of a Business Loan Interest Tax Deduction

One of the advantages of taking out a small business loan is the tax benefits that come with it. That way, you can use the funds to grow your business and achieve better results in the long run. If you still have questions around “are business loan payments tax deductible?” then speaking with a tax professional is the right move. Business tax experts can help in not only answering your questions, but also ensure you maximize a business loan interest deduction and save money.  

As always, every business owner’s situation is different, so speak with a professional advisor or visit Nolo if you have any questions as you prepare your business tax returns this year.

Louis DeNicola

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