How to Write off a Business Loan
Borrowed money used for business expenses makes it tax deductible. If you take out the loan for business purposes such as purchasing new equipment or hiring additional employees, the interest you pay on the loan is deductible business expenses. What matters is how the money is used, not the type of loan. If the company does not use the borrowed funds, the interest is not tax deductible. In addition, debts must legally belong to the company. You can`t claim a tax deduction on interest on your sister`s car loan, or claim interest on a loan for your personal vacation. For example, if you take out a $10,000 business loan in January with 8% interest over a five-year period, you`ll pay about $2,100 in interest over the life of the loan, of which about $750 was paid in the first year. You can claim $750 in interest as a tax deduction on your corporate income tax return. Note that if you repay the principal each year, interest rates will fall. Let`s say you took out a small business loan and your monthly payments are $1,200. If $840 of your payment was used to repay the principal, it means you pay $360 in interest each month on your business loan.
Only the $360 would be eligible for deduction as business expenses. Do you just want help claiming the deduction? Trust Block Advisors with any questions and to help you file your small business tax returns. If you`re a small business owner who took out a loan to grow your business, you might be worried about paying it back, especially with the extra interest. Here`s some good news for you: Interest on your business loan is tax deductible as a business expense. As always, it`s good to have an accountant by your side who understands the nuances of your business and finances. If you`re using a credit card to make major purchases for your business, you may be wondering if these interest rates are also something you can deduct. The good news is that it`s possible! So if you bought equipment or supplies with your credit card, you can incur interest that can be deducted and reduce your business` taxable income. There are two types of bad debts: trade receivables and non-trade receivables. Loan funds also need to be spent on something for your business, not just in a bank account to get interest deductions.
It`s not a business loan, yes – but if you`re using a personal loan for businesses, it`s relevant. Enter the interest paid on the business loan (from your 1098) on line 12 or line 23. Since there is no specific “commercial loan interest” line, you need to place the interest in one of these places and then fully document the loan (bank name, total amount, amount borrowed, payment) in the lines below or on an attached sheet. SBA loans, which are term loans partially guaranteed by the Small Business Administration, work the same way – and you can deduct your interest payments accordingly. As a general rule, interest on a fixed-term loan is deducted from the corresponding year in which the payments were made. In other words, if you take out a term loan with a three-year repayment period, you deduct the interest paid in each of the three consecutive taxation years, the amount deducted reflecting the amount you paid on interest in each of those years. You usually have the right to deduct interest only on borrowed funds spent for commercial purposes, such as . B the purchase of equipment. Interest paid on money while it is not used in your account is generally treated as investment interest that is only deductible from capital gains. Of course, as with everything else in tax legislation, not all situations are cut and dry to deduct interest from the loan. In some cases, there are exceptions that can affect whether the interest on your business loan is tax deductible – most often in connection with your use of the borrowed funds. If you take out a loan to buy another business, you will likely be able to deduct some or all of the interest on the loan.
If you get a loan that helps you buy another business for the purpose of actively running the business, you should be able to deduct the interest expenses. .