Deducting Business Interest and Bank Fees

As a small business owner, every deduction counts when it comes to reducing your tax liability. Two often overlooked areas that can provide significant tax savings are business interest expenses and bank fees. In this comprehensive guide, we’ll explore how to properly deduct these expenses and maximize your tax benefits.

Understanding Business Interest Deductions

Business interest refers to the cost of borrowing money for business purposes. This can include interest on:

• Business loans
• Lines of credit
• Credit card balances
• Mortgages on business property

Deducting business interest can result in substantial tax savings, but it’s crucial to understand the rules and limitations.

General Rules for Deducting Business Interest

In general, you can deduct interest paid or accrued on business debts during the tax year. However, there are some key requirements:

1. The loan must be for business purposes, not personal use.
2. You must be legally liable for the debt.
3. Both you and the lender must intend for the debt to be repaid.

Business Interest Expense Limitation

The Tax Cuts and Jobs Act of 2017 introduced a limitation on business interest expense deductions for certain taxpayers. For tax years beginning after 2017, the deduction for business interest expense is limited to the sum of:

1. Business interest income
2. 30% of adjusted taxable income
3. Floor plan financing interest

This limitation applies to taxpayers with average annual gross receipts exceeding $26 million (for 2021, adjusted annually for inflation).

Small Business Exception

Fortunately, many small businesses are exempt from this limitation. If your average annual gross receipts for the prior three tax years are $26 million or less (for 2021), you can fully deduct your business interest expenses.

Corvee’s tax planning software can help you determine if you qualify for this exception and calculate your maximum deductible interest.

Deducting Bank Fees

Bank fees are another often-overlooked deduction that can add up quickly for small businesses. These fees are generally fully deductible as ordinary and necessary business expenses.

Types of Deductible Bank Fees

Common deductible bank fees include:

• Monthly account maintenance fees
• ATM fees
• Overdraft fees
• Wire transfer fees
• Credit card processing fees
• Loan origination fees

It’s important to note that personal bank fees are not deductible, so be sure to keep your business and personal accounts separate.

Loan Origination Fees and Points

If you’ve taken out a business loan, you may be able to deduct loan origination fees or points. These fees are typically deductible over the life of the loan. However, if the loan term is less than one year, you may be able to deduct the full amount in the year paid.

Strategies for Maximizing Interest and Fee Deductions

To make the most of your business interest and bank fee deductions, consider these strategies:

1. Keep detailed records: Maintain accurate records of all interest payments and bank fees. Corvee’s client collaboration tools can help you organize and track these expenses efficiently.
2. Separate business and personal expenses: Use dedicated business accounts and credit cards to clearly distinguish between business and personal expenses.
3. Time your interest payments: If you’re using the cash method of accounting, consider paying interest before year-end to claim the deduction in the current tax year.
4. Review your loan terms: Understand the terms of your business loans and consider refinancing if it could lead to more favorable interest rates or deductible fees.
5. Consider the impact on other deductions: Be aware that interest deductions can affect other tax benefits, such as the Qualified Business Income (QBI) deduction. Corvee’s multi-entity tax planning features can help you model different scenarios to optimize your overall tax strategy.

Compliance and Documentation

Proper documentation is crucial when claiming deductions for business interest and bank fees. Here are some best practices:

1. Keep loan documents: Retain all loan agreements, including terms, interest rates, and repayment schedules.
2. Save bank statements: Keep monthly bank statements showing interest payments and fees.
3. Maintain a loan register: For businesses with multiple loans, maintain a register detailing each loan’s purpose, interest rate, and payment schedule.
4. Document business purpose: Be prepared to show how borrowed funds were used for business purposes.
5. Use accounting software: Utilize accounting software to categorize and track interest expenses and bank fees accurately.

Special Considerations for Different Business Structures

The way you deduct business interest and bank fees can vary depending on your business structure:

Sole Proprietorships

Sole proprietors report business interest and bank fees on Schedule C of Form 1040. These expenses are deducted directly from business income.

Partnerships and LLCs

Partnerships and multi-member LLCs report interest and bank fees on Form 1065. These deductions flow through to the partners’ individual tax returns.

S Corporations

S corporations report these expenses on Form 1120S. Shareholders then claim their share of the deductions on their personal tax returns.

C Corporations

C corporations deduct interest and bank fees directly on Form 1120, reducing the corporation’s taxable income.

Corvee’s federal tax planning tools can help you navigate the specific requirements for your business structure.

State and Local Tax Considerations

While we’ve focused primarily on federal tax deductions, it’s important to consider state and local tax implications as well. Some states may have different rules or limitations on deducting business interest and bank fees.

Corvee’s state and local tax planning features can help you stay compliant with various state regulations and identify additional deduction opportunities.

Leveraging Technology for Efficient Tax Planning

Navigating the complexities of business interest deductions and bank fee deductions can be challenging. That’s where advanced tax planning software comes in. Corvee’s comprehensive platform offers several advantages:

1. Accurate calculations: Our software can quickly determine your maximum deductible interest based on your specific business situation.
2. Scenario modeling: Test different loan structures and payment timings to optimize your deductions.
3. Multi-year planning: Project the impact of interest deductions over multiple years to make informed borrowing decisions.
4. Compliance tracking: Stay up-to-date with changing regulations and ensure you’re always in compliance.
5. Documentation support: Generate detailed reports to substantiate your deductions in case of an audit.

Empowering Your Business Through Strategic Tax Planning

Maximizing deductions for business interest and bank fees is just one aspect of comprehensive tax planning. By taking a proactive approach to your tax strategy, you can significantly reduce your tax liability and reinvest those savings back into your business.

Remember, effective tax planning is an ongoing process. Regularly review your borrowing strategies, banking relationships, and overall financial structure to ensure you’re maximizing your tax benefits while supporting your business goals.

Don’t leave money on the table. Get a free demo. Explore how Corvee’s tax planning software can help you optimize your deductions for business interest, bank fees, and much more. With our comprehensive suite of tools and expert support, you’ll be well-equipped to navigate the complexities of business taxation and maximize your savings year after year.