Deducting Business-Related Interest Loan Payments

Running a business often requires borrowing money, whether to buy equipment, expand operations, or bridge a temporary cash flow gap. The good news is that the interest you pay on business loans is usually tax-deductible, helping reduce your taxable income and your overall tax bill. It doesn't matter if the loan comes from a bank, a credit card, or even a personal source. What matters is how you use the money. If the borrowed funds are spent on legitimate business expenses, the interest you pay can typically be written off as a business expense.

This article explains when business loan interest qualifies for a deduction and the rules that apply to cars, home offices, and other kinds of loans.

When Can You Deduct Business Loan Interest?

Interest you pay on business loans is usually a currently deductible business expense. It makes no difference whether you pay the interest on a bank loan, personal loan, credit card, line of credit, car loan, or real estate mortgage. Nor does it matter whether the collateral you used to get the loan was business or personal property. If you use the money for business, the interest you pay to get that money is a deductible business expense. It's how you use the money that counts, not how you get it.

When Business Loan Interest Becomes Tax-Deductible

Your deduction begins only when you spend the borrowed funds for business purposes. You get no business deduction for interest you pay on money that you keep in the bank. Money in the bank is considered an investment. At best, you might be able to deduct the interest you pay on the money as an investment expense.

Because interest on money you borrow for personal purposes, like buying clothes or taking vacations, isn't deductible, you should avoid paying this type of interest whenever possible. If you own a business, you can do this by borrowing money to pay your business expenses, and then using the money your business earns to pay off your personal debt. By doing this, you "replace" your nondeductible personal interest expense with deductible business expenses.

Deducting Mortgage Interest for a Home Office

If you are a homeowner and take the home office deduction, you can deduct the home office percentage of your home mortgage interest as a business expense.

Car Loan Interest Deductions for Business Owners

If you use your car for business, you can deduct the interest that you pay on your car loan as a business interest expense. You can take this deduction whether you deduct your car expenses using the actual expense method or the standard mileage rate, because the standard mileage rate doesn't include interest on a car loan.

If you use your car only for business, you can deduct all of the interest you pay. If you use it for both business and personal reasons, you can deduct the business percentage of the interest as a business expense.

In addition, for 2025 through 2028, up to $10,000 in interest on car loans for some cars not used for business is deductible as a special personal deduction without itemizing. This deduction is available only for new cars, minivans, vans, sport utility vehicles, pickup trucks, and motorcycles that:

• are purchased 2025 and later
• are used for personal driving
• weigh less than 14,000 pounds, and
• had their final assembly in the United States.

Electric vehicles qualify if they meet these requirements. The deduction is phased out for single taxpayers with adjusted gross incomes over $100,000 ($200,000 for married taxpayers) filing jointly. It is reduced by $200 for each $1,000 of adjusted gross income (AGI) over these limits.

Presumably, a taxpayer who uses an eligible vehicle for both business and personal driving can take both deductions, based on the percentages of personal/business use. You're always better off deducting as much car loan interest as possible as a business expense because it reduces your income for purposes of self-employment taxes (Social Security and Medicare taxes), as well as income taxes.

Can You Deduct Interest on Loans From Family or Friends?

If you borrow money from a relative or friend and use it for business purposes, you may deduct the interest you pay on the loan as a business expense. However, the IRS is very suspicious of loans between family members and friends. You need to carefully document these transactions. Treat the loan like any other business loan: Sign a promissory note, pay a reasonable rate of interest, and follow a repayment schedule. Keep your canceled loan payment checks or bank statements to prove you really paid the interest.

Deducting Interest on Loans Used to Buy a Business

If you borrow money to buy an interest in an S corporation, a partnership, or an LLC, it's wise to seek an accountant's help to figure out how to deduct the interest on your loan. You must allocate the money among the company's assets. Depending on what assets the business owns, the interest might be deductible as a business expense or as an investment expense, which is more limited.

Interest on money you borrow to buy stock in a C corporation is always treated as investment interest. This is true even if the corporation is small (also called "closely held"), and its stock isn't publicly traded.

Business Loan Interest That Isn't Tax-Deductible

You can't deduct interest:

• on loans used for personal purposes
• on debts your business doesn't owe
• on overdue taxes (only C corporations can deduct this interest)
• that you pay with funds borrowed from the original lender through a second loan (but you can deduct interest on the new loan once you start making payments)
• that you prepay if you're a cash basis taxpayer (but you may deduct it the next year)
• on money borrowed to pay taxes or fund retirement plans, or
• on loans of more than $50,000 that are borrowed on a life insurance policy on yourself or another owner or employee of your business.

Points and other loan origination fees that you pay to get a mortgage on business property aren't deductible business expenses. You must add these amounts to the cost of the building and deduct them over time using depreciation. The same is true for interest on construction loans if you are in the business of building houses or other real property.

Learn More

Interest deductions can be a valuable tax-saving tool for entrepreneurs and small business owners. For more information on deductions that are available to small business owners, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).