When you take out personal loans to buy a Maine-based small business, you want to maximize the tax write-offs for the resulting interest expense. The tax law in this area can seem complicated. But if you do some research ahead of time and talk with Filler & Associates, you can get the best possible outcome.
The first thing a business owner should do is trace your interest expense outlays. Under tax law, any interest expense you incur must be classified into one of four categories:
1. Business interest, which is deductible in full.
2. Passive interest applies only to interest on loans to finance business activities in which you do not materially participate. The IRS defines this as working on a regular, continuous and substantial basis in business operations.
Passive interest is deductible in the current tax year if you have enough passive income but deferred to future tax years if you do not. Filler & Associates can help you figure out if you qualify for the current tax year deduction.
3. Investment interest is also deductible in the current tax year if you have enough investment income but deferred to future tax years if you do not. Again, see Filler & Associates to discuss your deduction.
4. Personal interest, which includes currently deductible qualified residence interest (from mortgages on up to two homes), currently deductible college loan interest, and nondeductible consumer interest (usually from credit cards that are not used for business and non-business car loans).
Once you trace how your used loan proceeds in each of the four categories, the corresponding interest expense goes into the same category.
The interest allocation procedure is different based on what type of business you are buying, as in sole-proprietorship, S-Corp, etc. Each situation has its own rules and considerations. Filler & Associates can help you plot the best strategy to deal with these business expenses.