Business owners have a few dates to mark on their calendars this month: March 15 to file business taxes, and March 17 to blow off some steam at the local Irish pub. Unfortunately, we can only offer advice on the former, but we’ve got good news for business owners who borrowed money this year — part of those small business loan payments are tax deductible. Looks like the luck of the Irish is on your side.
Your loan payments are split between paying interest and paying down the loan principal. The part of your payment that goes toward interest is tax deductible, but there are no loan deductions for the part that goes toward paying off the principal.
So, for example, let’s say you pay $1,000 a month for a business loan. $300 goes to interest while $700 goes toward the loan principal. You can deduct the $300 a month for interest, but the rest will not be tax deductible.
The Fine Print
In addition, your loan payments are tax deductible only if you meet the following requirements. You must:
- be legally responsible for the debt and have a signed contract.
- intend to pay the money back.
- have a true debtor-creditor relationship with the lender. If you borrow from a friend or family member, make sure to use a signed promissory note listing the interest rate and follow a clear repayment schedule. Otherwise, the IRS may deny your deduction.
- spend the loan proceeds on something for your business. If you just keep the money in the bank, you cannot take the tax deduction.
By taking advantage of this tax deduction, your loan payments will be a little more affordable and your next tax return a little less, well, taxing.