The Interest Expense Tax Deduction

The interest rate available today on a loan is very low. The government has kept the interest rates artificially low in an effort to stimulate the economy. Interest rates available to businesses as well as individuals greatly affect what they can and cannot do.

Businesses and individuals are permitted deductions for interest they pay for property. The interest deduction credit cards and other personally secured loans were deductible in the past but are not so anymore. Today the government has a cap on the amount of mortgage interest on a an individual may deduct on their personal tax return. If the value of the property bought for a personal residence exceeds $1 million, the government has a formula to determine what amount of interest the individual is permitted to deduct one their personal tax return.

Businesses follow different rules regarding interest expenses. Businesses that buy property for investment purposes, the interest paid is allocated to the actual poverty as an expense upon the sale of that property in an effort to determine the profit or loss on that property. If a business borrows money to produce a product for resale and the product is constructed within one year, the interested really added to the cost of the product rather than considered as interest expense. Also as a part of this, the tax regulations, if the cost of the product is $1 million or more, it is merely a part of the cost of the product. The interest a business pays for property it plans to own and occupy is deductible as interest expense on the front of Form 1120 or Form 1120S.

There are interest only loans that can be beneficial to both individuals as well as businesses. This is where the payments on the loan merely consist of interest payments and do not serve to reduce principal. In this situation, the use of the money will determine whether the interest is deductible on the tax return that would apply to the entity borrowing the money. If the money is used to buy investment property of some sort, on the personal tax return he would go as investment interest expense subject to the 2% limitation on the bottom of Schedule A. For a business if the loan is used to buy something other than property, it would be deducted as a part of the cost of goods sold or the value of the item for which it was bought.

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