Is business loan interest deductible?

The tracing rule: follow the money, not the collateral

Publication 334 is explicit that the test for business interest is what you did with the borrowed money. Interest relates to your business if you use the proceeds of the loan for a business expense, and it does not matter what type of property secures the loan. That surprises people in both directions. A loan secured by your house but spent on inventory produces business interest. A loan taken in the company name but spent on a family vacation does not, however it is labelled.

This tracing approach is why record-keeping matters more than the lender’s paperwork. If you borrow $20,000 on a personal line of credit and use $15,000 to buy equipment and $5,000 to pay a personal tax bill, three quarters of the interest is business interest. Keep the bank statements that show where the money went, and keep business and personal spending in separate accounts if you can.

Three requirements the debt must meet

The publication says you can deduct interest on a debt only if you meet all of three requirements. You must be legally liable for that debt. Both you and the lender must intend that the debt be repaid. And you and the lender must have a true debtor-creditor relationship. Together these exclude loans that are really something else: money you “borrow” from your own wholly controlled entity with no expectation of repayment, or a family arrangement with no schedule and no consequences for missing payments. A written note, a repayment schedule and actual payments are the ordinary evidence.

Accrued interest counts too. The publication talks about interest you pay or accrue during the tax year, which means an accrual-method business can deduct interest that has built up even though it has not yet been paid, subject to the related-person rule in the accounting-methods chapter. A cash-method sole proprietor generally deducts interest when paid.

Personal loans and mixed-use loans

Publication 334 states flatly that you cannot deduct on Schedule C 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. The calculator above does the division once you decide the business share.

The car-loan example in the publication is the cleanest illustration. You paid $600 of interest on a car loan in 2025 and used the car 60 percent for business and 40 percent for personal purposes, claiming actual expenses. You may deduct $360 (60 percent of $600) on Schedule C. The remaining $240 may be deductible as qualified passenger vehicle loan interest on Schedule 1-A, but you cannot claim the same interest twice. Enter 600 and 60 above to confirm the $360 and $240 split.

The business interest limit and Form 8990

Not every business deducts all of its interest. The publication notes that certain taxpayers must limit their business interest expense deduction, and that for tax years beginning in 2025 the calculation of adjusted taxable income adds back depreciation, amortization and depletion. It sends readers to the Instructions for Form 8990 to find out whether they must limit the deduction, who must file the form, and how certain businesses may elect out. Check those instructions for your own year before assuming the limit does or does not apply to you.

The publication also lists three topics it leaves to other guidance: how to allocate interest between personal and business use in more complex cases, when to deduct interest, and the rules for below-market-interest loans, which are loans with no interest or a rate below the applicable federal rate.

Worked example

Suppose you borrow $30,000 from a bank in 2025 and use $24,000 to buy tools and stock and $6,000 to pay off a personal credit card. You pay $2,400 of interest during the year. The business share is 80 percent, so $1,920 is business interest and $480 is personal. At the 15.3 percent self-employment tax rate in the same publication, taking the $1,920 deduction lowers SE tax by up to about $294 on its own, before the 92.35 percent adjustment and before any income tax effect. Those are illustrative numbers, not a forecast.

If instead you used the whole $30,000 in the business, the entire $2,400 would be business interest, subject to the same three requirements and to the Form 8990 limit where it applies.

Limits of this page

This page covers the general Schedule C rule. Mortgage interest on a home, student loan interest, and investment interest have their own rules and are not covered by Publication 334’s interest section. For how the insurance and prepayment rules work in the same chapter see is business insurance deductible, and for what happens to a loan when the lender forgives it see is canceled business debt taxable.

Sources

• IRS Publication 334, Tax Guide for Small Business (2025): Interest, in chapter 8 (Business Expenses). Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 334 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.