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The Tax Implications of Receiving a Business Line of Credit

Posted by Tom Hallissey on Dec 13, 2017 10:00:00 AM

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A business line of credit is one of the best ways to provide a financial lift to your growing company. While it may appear that all you need to do is pay down the principal, this type of loan can also have income tax implications worth considering.

What is a Business Line of Credit?

A business line of credit operates in the same way as a revolving credit card account. If you qualify, a bank or online lender can issue your business a credit line that is available for use in any way you see fit. You are only required to pay interest on the amount borrowed, which allows you to control interest payments.

Does a Business Loan have Tax Implications?

Although any loan has tax implications, the income from a business line of credit is not usually considered taxable income. However, business loan interest payments are generally tax deductible. If your lender forgives your debt for some reason, the amount forgiven becomes taxable income.

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The Interest Expense Deduction

Interest paid on a business loan is typically tax-deductible when the funds are used only for business purposes, such as purchasing equipment, inventory or supplies. If a portion of your business line of credit is used for something other than business expenses, the amount used for personal purchases is generally not deductible.

In order to qualify for this income tax deduction, it is important to maintain meticulous records. The IRS may require an itemization of items purchased with a business line of credit.

How to Double your Tax Write-offs

The IRS tax code allows business owners to write-off both the interest expense and 50 percent of the cost of depreciation for any equipment purchased with a business loan. This rare double tax deduction is an excellent way to defray the costs associated with upgrading your enterprise.

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Separating your Personal and Business Lives

If you secure a business line of credit, it should not be used for personal expenses. This common mistake can result in negative tax implications. If the IRS finds that even part of your business loan was used for personal purposes, the government could reclassify your loan as a personal line of credit and disallow interest-related tax deductions. In order to avoid this costly mistake, it’s recommended to create separate checking and savings accounts for personal and business purposes.

If you have any further questions about the tax implications of a business line of credit, contact your local tax accountant.

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