Yes! The IRS ‘business loan interest deduction’ allows you to write off the interest you paid on a business loan.
If you take out a loan for your small business, write down how much interest you pay during the year on 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 that type of interest.
Common uses for business loans understand:
- Start-up costs
- Signage, advertising or website development
- Property and building upgrades
- Building systems (such as plumbing, sprinklers, or HVAC systems)
- Code upgrades (like wheelchair ramps)
- Equipment or supplies
- Wholesale inventory purchases
Interest on a small business loan for any of these uses is deductible.
If the business does not use the borrowed funds, the interest is not tax deductible. In addition, the debt must legally belong to the company. You cannot claim a tax deduction for interest on your sister’s car loan, or interest on a loan for your personal vacation.
Regarding loan interest, the IRS specifies:
- Debt debt must be paid by the company so that the interest is deductible.
- If you take out a loan to buy new signage, but your grandma repays the loan as a gift, the interest is not deductible.
Loans to buy existing businesses: are they deductible?
If you take out a loan 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, this is a personal investment, not a traditional business expense. Depending on the situation, you may not be able to deduct the interest on such a loan. Talk to your own accountant or tax advisor before going ahead.
Loans from family or friends: are they deductible?
No. Only interest on official and documented loans from a bank, credit union or other financial institution is eligible for a deduction. Interest on a private loan is not deductible, so think carefully about your borrowing choices.
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 businesses. Whether you are a sole proprietor or a large business, almost all of the interest you pay on a business loan is deductible.
Is the 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 against the cash value of a life insurance policy, it will have to be repaid with interest, but you cannot deduct that interest when taxed.