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
- You and the lender have a true debtor-creditor
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
In 2000, you paid $600 interest on a car loan. During 2000, 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% of
$600) for 2000 on Schedule C or C-EZ. The remaining interest of
$240 is a nondeductible personal expense.
For more information about deducting interest, see chapter 5 in
That chapter explains the following items.
- Interest you can deduct.
- Interest you cannot deduct.
- How to allocate interest between personal and business
- 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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