Page 37 - Tax Guide for Small Business

12:18 - 30-Jan-2020
Page 35 of 54
Fileid: … tions/P334/2019/A/XML/Cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
interest on business loans or as an expense of financ- 8990 to determine whether you are required to limit your
ing loans. In the event of death, the proceeds of the business interest expense deduction, who is required to
policy are not taxed as income even if they are used file Form 8990, and how certain businesses may elect out
to liquidate the debt. of the business interest expense limitation.
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 2019, you paid $600 interest on a car
the worksheet in the Instructions for Forms 1040 and loan. During 2019, you used the car 60% for business and
1040-SR to figure your deduction. However, if any of the 40% for personal purposes. You are claiming actual ex-
following apply, you must use the worksheet in chapter 6 penses on the car. You can only deduct $360 (60% ×
of Pub. 535. $600) for 2019 on Schedule C. The remaining interest of
• You have more than one source of income subject to $240 is a nondeductible personal expense.
SE tax. More information. For more information about deduct-
• You file Form 2555 (relating to foreign earned in- ing interest, see chapter 4 in Pub. 535. That chapter ex-
come). plains the following items.
• You are using amounts paid for qualified long-term • Interest you can deduct.
care insurance to figure the deduction. • Interest you cannot deduct.
Use Pub. 974 instead of the worksheet in the Instruc-
tions for Forms 1040 and 1040-SR if the insurance plan • How to allocate interest between personal and busi-
established, or considered to be established, under your ness use.
business was obtained through the Health Insurance Mar- • Limitation on business interest.
ketplace and you are claiming the premium tax credit. • When to deduct interest.
Prepayment. You cannot deduct expenses in advance, • The rules for a below-market interest rate loan. (This
even if you pay them in advance. This rule applies to any generally is a loan on which no interest is charged or
expense paid far enough in advance to, in effect, create on which interest is charged at a rate below the appli-
an asset with a useful life extending substantially beyond cable federal rate.)
the end of the current tax year.

Example. In 2019, you signed a 3-year insurance con- Legal and Professional Fees
tract. Even though you paid the premiums for 2019, 2020,
and 2021 when you signed the contract, you can only de- Legal and professional fees, such as fees charged by ac-
duct the premium for 2019 on your 2019 tax return. You countants, that are ordinary and necessary expenses di-
can deduct in 2020 and 2021 the premium allocable to rectly related to operating your business are deductible on
those years. Schedule C. However, you usually cannot deduct legal
More information. For more information about deduct- fees you pay to acquire business assets. Add them to the
basis of the property.
ing insurance, see chapter 6 in Pub. 535.
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-
ness.
You generally can deduct as a business expense some or
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 also can 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
retirement plans for yourself and your employees.
tionship.
Certain taxpayers are required to limit their business in- • SEP (Simplified Employee Pension) plans.
terest expense deduction. See the Instructions for Form

Chapter 8 Business Expenses Page 35