By Jodh Mehmi, Mehmi Financial Group
In many cases interest on money borrowed for a business is deductible, but the rules depend on how the money is used and, in the USA, on the size of the business. This guide explains the general rules. It is not tax advice; confirm your situation with an accountant.
Canada: the use of the borrowed money matters
The Canada Revenue Agency explains its position in Income Tax Folio S3-F6-C1, Interest Deductibility. In general, interest is deductible when the borrowed money is used to earn income from a business or property. What counts is the current use of the funds, so money borrowed for the business but used for personal purposes can lose its deductibility.
- Keep business borrowing separate from personal spending.
- Track what each loan or line of credit draw paid for.
- Ask your accountant before changing how borrowed funds are used.
USA: deductible, with a limit for larger businesses
U.S. businesses can generally deduct business interest expense, but section 163(j) limits the deduction for some taxpayers. The IRS explains the limit in its questions and answers on the business interest limitation, and businesses calculate it on Form 8990. Smaller businesses that meet the gross receipts test are generally exempt from the limit; the IRS page for Form 8990 lists the current threshold.
Lines of credit
Interest on a business line of credit follows the same principles: it depends on what each draw was used for. A line used partly for personal costs mixes deductible and non-deductible interest.
Equipment loans and leases
For equipment, interest on a loan is usually deductible, while the equipment itself is depreciated (capital cost allowance in Canada). Lease payments are treated differently. See our CCA classes guide.
Fees and other costs
Loan fees can be treated differently from interest, and may need to be spread over time. Ask your accountant how origination or broker fees on your loan are handled.
Examples of how use of funds changes the answer
- Loan used to buy equipment for the business: interest is generally deductible as a business expense, while the equipment is depreciated.
- Line of credit used to pay suppliers: interest on those draws is generally deductible.
- Business line used to pay a personal bill: interest on that portion is generally not deductible.
- Loan refinanced into a new loan: deductibility generally follows the original use of the money; ask your accountant.
Recordkeeping that protects the deduction
Keep statements showing what each loan or draw paid for, especially where business and personal accounts are linked. Clean records make it easier to support the deduction if questioned and easier for your accountant to file correctly.
Leasing vs borrowing
With a loan, you deduct interest and depreciate the asset. With a true lease, the lease payments themselves may be deductible as an expense instead. Which works better depends on your tax position and the asset; see leasing vs buying a truck in Canada for one example.
Timing of the deduction
Interest is generally deducted in the year it accrues or is paid, depending on your accounting method. Prepaid interest and loan fees may need to be spread over the life of the loan rather than deducted all at once.
How Mehmi Financial Group can help
Mehmi Financial Group is a financing brokerage. We compare options from banks, equipment finance companies and alternative lenders for businesses in Canada, the USA, the UK and Australia (equipment financing is available in Canada and the USA). Each lender sets its own approval, rate and terms. You can compare business financing options or equipment financing options.
Frequently asked questions
Can I write off business loan interest in Canada?
Generally yes, when the borrowed money is used to earn business or property income, as the CRA explains in Folio S3-F6-C1.
Is business line of credit interest deductible?
It depends on what each draw paid for. Business use is generally deductible; personal use is not.
Is business interest deductible in the USA?
Generally yes, subject to the section 163(j) limit for larger businesses, calculated on Form 8990.
What is the 163(j) small business exemption?
Businesses under the gross receipts threshold are generally exempt from the limit. The IRS Form 8990 page lists the current threshold.
Can I deduct the loan principal?
No. Principal repayment is not an expense; for equipment, the asset is depreciated instead.
Should I talk to an accountant?
Yes. Tax treatment depends on your business, so confirm with a tax professional before relying on any deduction.