Almost any business loan interest is tax deductible (with a few exceptions). Traditional loans, business credit cards, and no doc business lines of credit are just a few. You can deduct the interest on these types of business debt, even if you used personal collateral. Auto loans even qualify for business loan interest deductions, as long as you’ve used them correctly and followed a few rules. The most important requirement is that loan proceeds went towards business expenses.

Rules You Should Know About Deducting Business Loan Interest

Tax rules are that you must be the person responsible for the loan to deduct business loan interest. The funds must be a debt, meaning you and the creditor intend for the loan to be repaid. If the lender forgives the debt, it doesn’t qualify. You and the lender must also have a true debtor, creditor relationship. That’s something we’ll discuss further in the "loans from family and friends" section.

Auto Loan Interest Rules

If you pay installments on an auto loan, you can deduct the interest you pay with each installment. That is if it is a business vehicle or even a personal one you use for business. If you alternate your vehicle between business and personal use, you won’t deduct the full amount of interest. Whatever percentage of the time you use the car for business, that’s the percentage of interest you can deduct.

Business Purchases, Mortgage Purchases, Investments

Rules are more extensive when using a business loan to acquire another business, building or to invest period. When you need to know if business loan payments are tax deductible for those reasons, get additional help. The IRS or an accountant will have the "Dos and Don’ts" of tax deductions for loan interest on business acquisitions.

Loan Interest from Friends or Family

Loans from friends and family may be tricky. With people you’re acquainted with, you do have some specific tax rules to follow. You can’t just call a gift a loan. Tax regulations want to make sure you’re not just trying to find a tax break. You also can’t immediately deduct interest payments if your accounting methods differ.

For those reasons, notes and financial statements are very important. With banks and alternative lenders, they have certain statement and legal document requirements. Family and friends don’t. If you raise a red flag with tax auditors, the burden of proof lies with you.

What If I Use the Loan for More Than One Purpose?

It’s best not to use a loan for business and personal expenses. If you do so, you’ll need to follow the rules. Divide the loan interest amount based on the portion of the loan you’ve used for each purpose. For example, what if you took out a business loan and used 70 percent of the funds to buy new equipment? You used the other 30 percent to pay bills at home. That means at tax time only 70 percent of your interest qualifies as tax deductible for your business.

The same rule applies if you have a business partner who shares responsibility for the loan. If you and a partner took out the loan, you can’t claim 100 percent of the interest. According to the paperwork, you are only 50 percent responsible for the loan. You must split the interest in half, deducting 50 percent of the loan interest.

Types of Loan Interest That’s Not Deductible

When learning your options with are business loan payments tax deductible, there are some rule exceptions. The IRS doesn’t allow some interest payments as deductions. Make a note that you can’t deduct these types of interest:

• Interest you paid with another loan from the same lender
• Loan interest from funds to pay taxes
• Past due taxes (except C-Corps)
• Interest you capitalize
• Standby fees
• Interest paid before the year it’s due (for cash basis tax payments)
• Life insurance loan interest
• Interest on cash value that wasn’t borrowed
• Refunded interest
• Retirement fund loan repayments

Document Business Activity

It’s important to stay organized in business for many reasons. Business taxes is one of those times organization is critical. You need to know details about the loan, like what you used it for, when you used it and the amount of interest. Keep up with paperwork for the loan, bank and billing statements, and receipts. That helps when your lender doesn’t send annual interest statements.

Good records in one place make deducting business loan interest easier. According to Forbes, flawless records are a lifesaver if you’ve used personal loans or credit to fund business expenses. Using personal loans for business can be hard to prove. Keeping up with necessary documents can spare you audits and/or penalties down the road.

The year you deduct business loan interest must coincide with the year you used the funds. Your business records should reflect that. You may have a working capital loan where a portion of it sits in your account. That portion won’t qualify for a deduction until you use it.

When thinking about if business loan payments are tax deductible, keep a few rules in mind. At this time, interest paid or accrued qualifies as a deduction. It must be money you’ve already used at the time you’re deducting it. When you’re looking to catch a tax break any way you can, remember your loan interest payments — it could save you a bundle in taxes, or at least lighten your load.

Consult with a Business Tax Expert

Tax rules change all the time. That’s why it’s important to have experts on your team to help you better understand your business taxes. They will keep up with current IRS rules. That way, you’ll always know if business loan payments are tax deductible. Start by getting a tax attorney and accountant to handle your tax needs.

About the author:
Brittni is a millennial, entrepreneur and investor in the IT and credit and lending industries. She writes about her experiences as a business owner and uses data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to improve their credit and finances, obtain business capital and build successful businesses doing what they love.