To grow your business, sometimes you need an infusion of cash. If you want to invest in a new type of marketing, buy more equipment or spend money on other essentials, you occasionally may need to take out a loan. Best of all, when tax time rolls around, that loan entitles you to special deductions. Here's what you need to know.
1. The Loan Must Be for Business
In order to claim a business deduction related to a loan, the loan has to be for business purposes. As indicated above, you can use the funds to cover a specific expense, but you can also use the money to cover routine expenses such as utility bills and payroll.
If needed, you can juggle around funds to ensure the money is used for business purposes. For example, let's say that you have money in your business account to pay for your business-related bills. However, you are short of money for your personal expenses. In this case, you can essentially take the money from your business account to cover your personal expenses and then use the funds from the business loan to cover business expenses.
The exact process for moving money like this varies based on your business structure. If you are a self-employed freelancer, all the business profits are considered income, so you don't need a paper trail to pay yourself from your business. On the other hand, if your business is structured as a corporation, you will need to note that you paid yourself or issued a bonus.
2. You Can Only Deduct the Interest and Fees
At tax time, you can claim the interest and fees from the loan as business expenses. As a self-employed individual, you report those amounts on Schedule SE. That is the same form you use to report all your business income and expenses. If you have a corporation, you report the interest on your corporate tax return.
You cannot deduct the principal part of the loan. However, you can deduct the cost of items you purchased with the loan. To explain, imagine you bought a new computer for your business with a loan. In this case, you can write off the cost of the computer, but you can't write off the loan itself. That would be a double claim.
3. Interest From Other Loans May Qualify for a Write-Off
In some cases, you may be able to write off interest from other types of loans as business expenses. In particular, if you use your home or vehicle for work, you may qualify to write off some of your car loan or mortgage interest as business expenses. The amount you can write off depends on the portion of the time you use that asset for work as well as a few other factors.
For instance, if you use your vehicle 20 percent of the time for your business and 80 percent of the time for personal reasons, you can claim 20 percent of your vehicle's expenses as business deductions. That includes maintenance and upkeep, gas and loan interest, among other expenses. Alternatively, with vehicles, you can just claim a set rate based on the number of miles you drive per year.
When it comes to your home office, you must use the area exclusively for work or regularly meet clients there. If the space qualifies, you can write off the corresponding percentage of your mortgage interest. For example, if your office takes up 5 percent of your home's total square footage, you can write off 5 percent of your mortgage interest as a business expense.
Do you need a loan for your business? Do you want help understanding tax issues? Then, you're in luck. At Bell Financial Services, LTD, we handle both. You can apply for a loan with us and hire us to do your taxes.