The tax rules for interest deductions depend on which category the expenses are in. Here are the categories that apply to expenses that individuals can incur:
1. Business Interest. This is fully deductible. You can deduct business interest on money spent for expenses or supplies and equipment, as long as you materially participate in the operations of the business.
2. Passive Interest.This is a subcategory of business interest, but applies only to interest on loans to finance passive business activities in which you do not materially participate. The interest is treated as a passive expense item and is included in computing the overall taxable income or loss from the activity in question
3. Investment Interest. These deductions depend on how much income you have from investments. When interest expenses from investments exceed investment income, the excess is carried forward to future years. For most people, investment income consists of taxable interest income and short-term capital gains.
4. Personal Interest. This is nondeductible unless it is either qualified education loan interest, or qualified residence mortgage interest.
For more information about interest deduction categories, talk with Filler & Associates.