Is interest expense tax deductible?

What is interest expense?

Interest expense represents the cost a business pays to borrow money — for example, through loans, credit cards, or equipment financing. It’s recorded on the income statement as a non-operating expense, since it’s not tied directly to producing goods or delivering services but rather to financing the business.

How to categorize interest expense

• Record as Interest Expense under Non-Operating Expenses on your income statement.
• Use a “Loan Interest” or “Bank Interest” account in your chart of accounts.
• Include interest from business loans, credit lines, equipment financing, or mortgages on business property.
• Exclude personal loan or credit card interest; only business-related interest is deductible.
• Separate principal payments (not deductible) from interest payments (deductible).

Examples of deductible interest expenses

• Interest on business loans or lines of credit.
• Mortgage interest on commercial property.
• Interest on equipment or vehicle financing.
• Business credit card interest for operational purchases.
• Late payment interest on business accounts payable.

Tax implications for interest expense

• Business-related interest is tax-deductible as long as the borrowed funds are used for business activities.
• The deduction is limited to the business interest expense deduction cap (generally 30% of adjusted taxable income for larger businesses).
• Small businesses (under $27 million in average annual gross receipts as of 2025) are exempt from this limitation.
• Interest on personal loans, tax penalties, or capitalized construction interest is not deductible.
• Deduct business interest on Schedule C (for sole proprietors) or under “Interest Expense” on your business tax return.
• Maintain loan agreements, amortization schedules, and payment records as proof of the business purpose of the debt.