Interest Tax Deduction

For many entrepreneurs paying interest, whether on a vehicle, property, credit card or general business loan is a normal part of day to day activities. The amount you pay in excess of the principal you borrow (interest) is generally deductible depending on its nature on either your Schedule C, Schedule E, Schedule A or even your Form 1040.


Deborah is a freelance photographer who borrowed $20,000 to upgrade the camera equipment she uses in her business. Deborah ended up spending $16,000 on the equipment, but used the other $4,000 to throw herself a birthday party and replace some furniture in her house. Last year she paid $1,300 in interest on the outstanding loan balance. Since she only used 80% of the loan proceeds for her business she can only deduct $1,040 of the interest on line 16 of her Schedule C.


In October of last year, Roger began hosting his vacation home (which qualifies as a personal residence) on Airbnb, renting it for 36 days during the last three months of the year. Last year, Roger incurred $5,000 of interest expense on the property. When he files his tax return this April, he can deduct approximately 10% (36/365), or $500 of the interest on line 12 of his Schedule E, and the remaining $4,500 balance on his Schedule A (assuming he itemizes his deductions).


Foxy is a full time Lyft driver who recently purchased a new car to use in her rideshare business. Her car payments total $420 per month and are comprised of both principal and interest. Last year Foxy's car payments for the full year totaled $5,040, of which $500 was interest and the remaining balance principal. Regardless of if Foxy deducts her vehicle expenses using the actual method or the standard mileage rate, since she uses her vehicle 80% for Lyft she could deduct $400 of interest payments on line 9 of her Schedule C.


Danny is a real estate agent that flips houses for homeowners that need cash fast. He acquired an investment property in September of 2014 by taking out hard money loan of $100,000 due on January 1st with a 15% apr. Danny sold the house he took the loan out for in December so he had no problem paying back the $100,000 principal and $3,750 of interest ($100,000 x .15 x 3/12) on January 1st, the agreed upon due date. Since Danny is a cash basis taxpayer and the interest was not paid until 2015, he will not be able to deduct the $3,750 of interest expense on his Schedule C until next year when he files his 2015 tax return.


Filo is a sculptor based out of New York City who recently borrowed $10,000 to build out her new studio. She ended up spending $8,000 on construction and used the remaining $2,000 to cover day to day expenses. Since Filo used the entire loan for business purposes, she can deduct 100% of the interest expense on her Schedule C.


  • Interest for your business is generally deductible on Schedule C, your rental property Schedule E, your home mortgage and investments Schedule A, and your student loans Form 1040.
  • You may not be allowed to deduct certain types of personal interest including credit card interest, personal finance charges, interest for non-business car use and interest paid on personal bills, to name a few.
  • Interest income you receive from investments, savings accounts, CDs, loans, etc. is typically included in your gross income, unless it is tax-exempt interest (i.e. municipal bond). Note that interest income you receive is not deductible.
  • Do your best to separate your business activity from your personal activity, especially when you have a loan, line of credit, or borrowed money that is supposed to be dedicated to your business. Further, if you are using a loan for business and personal expenses be sure to keep track of what portion of the loan proceeds are related to business and what portion personal so you are able to calculate your deductible business interest expense.
  • There are many different types of interest and various treatments and limitations on how interest expenses are deductible, many of which are not included in our overview. You should consult with your tax advisor to determine how you may be able to deduct your specific interest expenses.

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