Business interest expense deduction

This guide helps you understand how to deduct interest on your business debts —such as commercial bank loans and your company's credit cards— and the key rules when those debts are shared with personal use.

Which interest is deductible?

Generally, the law lets you deduct as a business expense some or all of the interest you pay or accrue during the tax year on debts directly related to running your business. Interest is business-related if you use the funds from that loan or card specifically to cover a business expense. For this deduction, it doesn't matter what kind of property or asset was used to secure the loan.

Core requirements

For a debt's interest to qualify as a business deduction, your situation must meet these three:

• Legal liability: you must be legally responsible for the debt.
• Intent to repay: both you and the lender must genuinely intend the loan to be repaid.
• True relationship: a real debtor-creditor relationship must exist between you and the lender.

Mixed-use loans

Keeping personal and business finances separate is essential. You can't use your business return (Schedule C) to deduct interest on purely personal loans. If a debt (a card or loan) is used for both business and personal purposes, you must split the interest by each use.

The limit (Section 163(j))

If your business has a high volume of operations, watch the Section 163(j) limitation. In general, deductible business interest expense for a year can't exceed the sum of:

• Your business interest income for the year.
• 30% of your adjusted taxable income (ATI) for the year.
• Any floor-plan financing interest expense.