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Can interest or money loaned be used as a tax deduction?
Expert: John R Mott
I have a small business and I loaned my business money for start-up costs. The amount I loaned my business can I use that as a tax deduction? The money I used was from a severance package which when I cashed it in I was charged 30 per cent interest. Can I use the interest charge as a tax deduction?
John R Mott answered:
You may not deduct your loan, per se, as a business expense. You may, however, deduct any legitimate business expenses that were funded by the loan. In determining whether a particular expense is deductible for tax purposes, the source of the funds to pay the expense is not relevant. What is relevant is whether you incurred the expense for the purpose of earning income from a business. There are also a number of other rules that limit or deny a deduction for certain types of expenses. For example, only 50 per cent of expenses for business related meals and entertainment are deductible for tax purposes.
Expenses for capital items (e.g. furniture and equipment) are not deductible as current expenses. These costs must be depreciated over time at prescribed depreciation rates.
Your severance payment must be reported as income on your tax return. The 30 per cent withholding from your severance was on account of income taxes, not interest. The actual tax liability associated with your severance will be determined on your tax return. The 30 per cent withholding may prove to be excessive or deficient, depending on your actual tax bracket. In other words, you may be due a refund or you may have an additional balance owing. But in either case, the 30 per cent withholding tax is not a business expense.
About the author
John Mott is a chartered accountant and tax specialist with a private practice in mid-town Toronto. He provides tax, accounting and advisory services to individuals and small businesses. He may be visited online at: johnmott.com.