Interest

You can generally deduct on Schedule C or C-EZ all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.

• You are legally liable for that debt.
• Both you and the lender intend that the debt be repaid.
• You and the lender have a true debtor-creditor relationship.

You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. If a loan is part business and part personal, you must divide the interest between the personal part and the business part.

Example. In 2001, you paid $600 interest on a car loan. During 2001, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% × $600) for 2001 on Schedule C or C-EZ. The remaining interest of $240 is a nondeductible personal expense.

More information. For more information about deducting interest, see chapter 5 in Publication 535. That chapter explains the following items.

• Interest you can deduct.
• Interest you cannot deduct.
• How to allocate interest between personal and business use.
• When to deduct interest.
• The rules for a below-market interest rate loan. (This is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.)

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