Can you write off a loan repayment on your taxes?

Nope – you generally can’t write off a loan repayment – even on your business taxes. Though you CAN often write off all (or some) of the interest that you pay on the loan You may be able to write off other expenses associated with the loan as well. Let’s get into it real quick.

Disclaimer: The tax code is complex and always changing. This page is for entertainment only and it is not meant to be taken as tax advice. If you really want to know – pore* through the IRS publications. We strongly advise that you hire a tax professional instead. Like us for example (hint hint).

Click here if you want to see our rates and to prepare your taxes online.

*(Yes, it’s “pore” and not “pour” – I had to check)

Why can’t you write off a loan repayment?

Nope, forget it. Not even on your business taxes. I want you to like me, but you can’t do it.

Here’s why.

Let’s say a bank loans your small business $50,000 to make screen doors for submarines. 

In year one of your business you make $100,000 in sales and you have $70,000 in expenses, resulting in a net profit of $30,000

Submarine owners must really dig screen doors because in your second year you earn $200,000 in sales and you have $90,000 in expenses. That’s $110,000 in net profit.

With all of that money you made, you decide to repay the loan at the end of year two.

Can you write it off? Again, no, you can’t.

Why?

Because you didn’t count it as income (part of your taxable net profit) in year one, so how could it be an expense in year two?

Loan repayment is only a transfer of equity, not an expense

Receiving the loan and the loan repayment are simple transfers in equity, and therefore not income and expense events.

In year one, you received $50,000, but you also took on a liability of $50,000. You have no gain here. You’re not ahead. It’s “Even Steven” for tax purposes.

In year two, you pay it back. Sure, you are out $50,000, but the liability equal to $50,000 was also taken off of your shoulders. Again – no blood.”

No income and no expense. You are just shifting equity around.

In most of these cases, there are not taxable or deductible events (there are some complex {and super boring} exceptions – usually involving distributions from your business that exceed your cost bases – but I don’t want to put you to sleep. If this might be you, hire a tax professional and quickly.)

Did I mention you can hire us here to prepare your taxes professionally online?

Oh – did I mention, we also specialize in s corporation and partnership taxes. Click here for help.

 

write off loan repayment

 

You CAN often write off interest and other expenses on your loan

There are lots of limitations and exceptions, and the ability to write off interest may depend on if it is a loan for personal or business use, a loan for qualified education expenses, or a loan on your home or (maybe) other property.

Here is a very quick summary of when you can write off loan interest and maybe other expenses.

  • Home mortgage interest on your main home (has lots of rules and limits)
  • Prepaid points on a home mortgage (has even more complex rules and limits)
  • Student loan interest on qualified education expenses (has lots of rules and limits)
  • Business or rental property loan interest (has rules and limits – why taxes are so darned complicated I don’t know)
  • Business loan expenses (mostly)

Again, please go through the IRS publications before pulling the trigger on these deductions.

Or click here to engage with us online for your tax preparation.

 

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