Interest on personal loans and credit cards is generally not a deductible expense. But one important exception to this general rule is when you use a personal credit card or take out a personal loan to pay for business-related expenses. In this situation, the interest is deductible as a business expense provided you meet the following two requirements:
- The loan or credit card must be used to pay for ordinary and necessary business expenses. This includes things like inventory, computers and other equipment, legal and other expenses to start a new business, rent, supplies, travel expenses and payroll that are directly related to your business.
- You must be the one legally obligated to pay the debt. In other words, you cannot use someone else’s credit card or use the proceeds of a loan that is in someone else’s name. It also must be a bona fide loan that you are legally obligated to repay, not just an informal arrangement between friends or family members.
What if I use the same loan or credit card for both business and personal expenses?
If this happens, you will have to split the interest between business and personal expenses. For example, if you use a credit card to pay for $8,000 of business expenses and $2,000 of personal expenses, you can only deduct 80% ($8,000 / $8,000 + $2,000) of the credit card interest from your business income.
Calculations to split-interest between personal and business use can quickly become complex if you carry a credit card balance from month to month. That is why if you are going to use a personal credit card (or loan) to fund your business, it is usually a good idea to choose one credit card to use for business, and another personal card to use for personal expenses.
In either case, be sure to keep your receipts and credit card or loan statements plus any calculations you make to split the interest between personal and business use.
If you have any questions regarding the deductibility of personal loan interest, please feel free to contact our offices.