Page 41 - Small Business Taxes

16:29 - 11-Jan-2023
Page 35 of 53
Fileid: … tions/p334/2022/a/xml/cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Self-employed health insurance deduction. You may You cannot deduct on Schedule C the interest you paid
be able to deduct the amount you paid for medical and on personal loans. If a loan is part business and part per-
dental insurance and qualified long-term care insurance sonal, you must divide the interest between the personal
for you and your family. part and the business part.
How to figure the deduction. Generally, you can use Example. In 2022, you paid $600 interest on a car
the worksheet in the Instructions for Form 1040 to figure loan. During 2022, you used the car 60% for business and
your deduction. However, if any of the following apply, you 40% for personal purposes. You are claiming actual ex-
must use the worksheet in chapter 6 of Pub. 535. penses on the car. You can only deduct $360 (60% (0.60)
• You have more than one source of income subject to × $600) for 2022 on Schedule C. The remaining interest of
SE tax. $240 is a nondeductible personal expense.
• You file Form 2555 (relating to foreign earned in- More information. For more information about deduct-
come). ing interest, see chapter 4 of Pub. 535. That chapter ex-
• You are using amounts paid for qualified long-term plains the following items.
care insurance to figure the deduction. • Interest you can deduct.
See Form 8962 and its separate instructions and use • Interest you cannot deduct.
Pub. 974 if the insurance plan established, or considered
to be established, under your business was obtained • How to allocate interest between personal and busi-
through the Health Insurance Marketplace and you are ness use.
claiming the premium tax credit. • Limitation on business interest.
Prepayment. You cannot deduct expenses in advance, • When to deduct interest.
even if you pay them in advance. This rule applies to any • The rules for a below-market interest rate loan. (This
expense paid far enough in advance to, in effect, create is generally a loan on which no interest is charged or
an asset with a useful life extending substantially beyond on which interest is charged at a rate below the appli-
the end of the current tax year. cable federal rate.)

Example. In 2022, you signed a 3-year insurance con-
tract. Even though you paid the premiums for 2022, 2023, Legal and Professional Fees
and 2024 when you signed the contract, you can only de-
duct the premium for 2022 on your 2022 tax return. You Legal and professional fees, such as fees charged by ac-
can deduct in 2023 and 2024 the premiums allocable to countants, that are ordinary and necessary expenses di-
those years. rectly related to operating your business are deductible on
More information. For more information about deduct- Schedule C. However, you usually cannot deduct legal
fees you pay to acquire business assets. Add them to the
ing insurance, see chapter 6 of Pub. 535. basis of the property.

If the fees include payments for work of a personal na-
Interest ture (such as making a will), you can take a business de-
duction only for the part of the fee related to your busi-
You can generally deduct as a business expense some or ness.
all interest you pay or accrue during the tax year on debts Tax preparation fees. You can deduct on Schedule C
related to your business. Interest relates to your business the cost of preparing that part of your tax return relating to
if you use the proceeds of the loan for a business ex- your business as a sole proprietor or statutory employee.
pense. It does not matter what type of property secures You can also deduct on Schedule C the amount you
the loan. You can deduct interest on a debt only if you pay or incur in resolving asserted tax deficiencies for your
meet all of the following requirements. business as a sole proprietor or statutory employee.
• You are legally liable for that debt.

• Both you and the lender intend that the debt be re- Pension Plans
paid.
• You and the lender have a true debtor-creditor rela- You can set up and maintain the following small business
tionship. retirement plans for yourself and your employees.
Certain taxpayers are required to limit their business in- • SEP (Simplified Employee Pension) plans.
terest expense deduction. See the Instructions for Form • SIMPLE (Savings Incentive Match Plan for Employ-
8990 to determine whether you are required to limit your ees) plans.
business interest expense deduction, who is required to
file Form 8990, and how certain businesses may elect out • Qualified plans (including Keogh or H.R. 10 plans).
of the business interest expense limitation. SEP, SIMPLE, and qualified plans offer you and your
employees a tax-favored way to save for retirement. You

Chapter 8 Business Expenses Page 35