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Interest:   Expense

Interest

You can generally deduct on Schedule C or C–EZ all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.
  • You are legally liable for that debt.
  • Both you and the lender intend that the debt be repaid.
  • You and the lender have a true debtor-creditor relationship.
You cannot deduct on Schedule C or C–EZ the interest you paid on personal loans. If a loan is part business and part personal, you must divide the interest between the personal part and the business part.


Example.  In 2001, you paid $600 interest on a car loan. During 2001, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% x $600) for 2001 on Schedule C or C–EZ. The remaining interest of $240 is a nondeductible personal expense.



More information.

For more information about deducting interest, see chapter 5 in Publication 535. That chapter explains the following items.
  • Interest you can deduct.
  • Interest you cannot deduct.
  • How to allocate interest between personal and business use.
  • When to deduct interest.
  • The rules for a below-market interest rate loan. (This is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.)
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