Yes! The IRS “business loan interest” deduction lets you write off the interest you paid on a business loan.
If you take a loan out for your small business, keep track of how much you pay in interest over the year for your taxes.
Can I claim business loan interest on my business taxes?
Usually, yes. If the funds are used for your small business and come from a financial institution, the IRS approves deductions for this kind of interest.
Common uses for business loans include:
- Start-up costs
- Signage, advertising or website development
- Property and building upgrades
- Building systems (such as plumbing, sprinklers or HVAC systems)
- Code upgrades (such as wheelchair ramps)
- Equipment or supplies
- Bulk inventory buys
The interest on a small business loan for any of these uses is deductible.
If the business doesn’t use the borrowed funds, the interest is not tax-deductible. Also, the debt must legally belong to the business. You can’t claim a tax deduction for the interest on your sister’s auto loan, nor can you claim the interest on a loan for your personal vacation.
Regarding loan interest, the IRS states:
- Loan debt must be paid by the business for the interest to be deductible.
- If you take out a loan to purchase new signage, but your grandmother pays off the loan as a gift, then the interest is not deductible.
Loans to buy existing businesses: Are they deductible?
If you take out a loan in order to buy an existing business, the interest will be tax-deductible.
However, if you want to buy another business but don’t expect to run it, that’s a personal investment and not a traditional business expense. Depending on the situation, you might not be able to deduct the interest from such a loan. Talk to your own accountant or tax advisor before moving forward.
Loans from family or friends: Are they deductible?
No. Only interest on official, documented loans from a bank, credit union or other financial institution qualifies for a deduction. The interest on a private loan is not deductible, so consider your borrowing choices carefully.
Does the size of a business affect the ability to deduct interest?
No. Both large and small businesses can take out loans to advance their operations. Whether you're a sole proprietor or a large business, almost any interest you pay on a business loan is deductible.
Is interest on a refinanced loan tax deductible?
No. If you pay off a business loan by borrowing more money, the interest on the original loan is no longer deductible. Once you start making payments on the new loan, those interest payments are deductible.
There are other times when the interest on a business loan is not deductible. For example, if you borrow money from the cash value of a life insurance policy, it will need to be paid back with interest, but you can’t deduct this interest at tax time.
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