You can generally deduct as a business expense 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 2005, you paid $600 interest on a car loan. During 2005, 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% × $600) for 2005 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 generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.)
Information courtesy of the Internal Revenue Service.
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