 Income tax 2021-2022, business expenses, interest. Get ready to get refunds to the max, dive into income tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business Tax Year 2021, income tax formula line one, income. We would have a sub-schedule, basically an income statement, income and expenses. We're focusing in on the expenses side of things here, expenses basically being deductions. The net then would roll into line one income of the income tax formula and page one of the form 1040 that we see here. It would start on the schedule C, bottom line of the schedule C, rolling into the schedule one, schedule one then rolling into page one of the form 1040 line number eight. This is the schedule C profit or loss from business, basically an income statement. We're now looking at interest and thinking about the deduction or deductibility of interest. You can generally deduct as a business expense, some or 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 secured the loan, you can deduct interest on a debt only if you meet all of the following requirements. So let's see if we can recap that and give a general idea here. We're looking at interest, we're looking at the deductibility of interest specifically on the schedule C as opposed to deductibility of interest that may be deductible elsewhere, possibly on the schedule A for the itemized deductions. We're looking schedule C here. When we're thinking about the schedule C for expenses, the deductible items, we're looking for ordinary and necessary expenses in order to help us to generate the revenue. Interest is usually gonna be related to of course some kind of financing. So you would think that if there was financing such as a loan, the interest related to that financing might be deductible then on the schedule C. So you can get into the details in terms of what kind of loan is going to be set up, what kind of property possibly is securing the loan in order to safeguard the lender. But the general concept would be, well, is it a business loan? You would think if it was a business loan, it would be more clear if you had of course business property possibly securing the loan as well. So that's gonna be the general idea. Remember when we take out a loan, what happens is if we get the money from the bank for example in a typical type of loan, we don't record that as basically income at that point in time or an expense, we put it on the books as a liability. So we increase the cash, we get the cash for the business and then the other side goes to a liability. The liability is not on the tax return because the tax return doesn't have the balance sheet portion of the financial statements but only the income state portment. And then we pay off the loan possibly in monthly installments. If it was an installment loan, when we pay off the loan, the amount that's paying back the principal, the liability, not deductible because it's just paying back the money that we got but the amount that's the rent on the money, the rent on the purchasing power, just like when you're paying rent, say on the office building that you're using, that part is deductible, we call that interest. So that's not paying down the loan, that's interest. So that's the part that we're trying to determine whether or not we get an expense for it, basically a deduction on the schedule C. And again, generally if it was a business loan, you would think yes. Now you can think of loans that are a little bit more confusing. So for example, if you had the mortgage that you have and then you have your home office, your home office now is kind of like your business area of your home, which you're paying the loan on but the loan is covering both a business and a personal kind of component. So in that instance, you might have to basically divvy up the amount of interest that is being deductible on schedule C and possibly schedule A. So that's the general idea. So back to it, you could deduct interest on a debt only if you meet all of the following requirements. You are legally liable for the debt. So it's gotta be actually your debt that you're being paying here. So both you and the lender intend that the debt be repaid. So obviously it's gotta be a real debt in that instance you intend to be repaid. You and the lender have a true debtor-creditor relationship. So obviously if it's an arm's length type of thing, if it's a bank you're dealing with, you would think that would be the case. If it's a lender with your family member, then people structure weird things in order to do weird things and some of those weird things might be to try to pay less taxes. And so it's gotta be an actual real debtor-creditor relationship. Certain taxpayers are required to limit their business interest expense deduction. So see the instructions for form 8-9-9-0 to determine whether you are required to limit your business interest expense deduction who is required to file form 8-9-9-0 and how certain business may elect out of the business interest expense limitation. You cannot deduct on schedule see the interest you paid on personal loans. So credit card debt can't do that. The mortgage on your home, if you have a home office, maybe, but if not, not on the schedule C, but possibly elsewhere on say the schedule A, for example. So other, you know, if it's the interest on your car, well maybe, I mean, if it was a business car, maybe, but if your personal car certainly not, in that instance as well, not something deductible, because it's not a business loan. If your loan is part of the business and part of it, if a loan is part business and part personal, you must divide the interest between the personal part and the business part. So you would like to avoid doing this in your normal practices when you take out a loan, if you're like, my business needs money and I need to go on vacation to the Bahamas. So I'm gonna take out one loan to cover both of those things. You probably don't wanna do that because then you've complicated things because now you got a personal side and a business side of things. But sometimes you can't avoid it, like for example, if you had a loan on the home and you use part of the home for your business, now you've got a home office kind of thing and you might have to do some allocation between the Schedule C and the Schedule A. That car loan possibly could be another kind of instance where it's business and personal, for example. So example, in 2021, you paid $600 interest on a car loan. During 2021, you used to carve 60% for business and 40% personal purposes. You are claiming actual expenses on the car. So notice big point there. You're not using the mileage method but actual expenses on the car. Otherwise, you would think that the loan portion that's going towards your business usage would be compiled in the mileage method calculation. You can also deduct 360, 60% or 0.6 of 600 for 2021 on Schedule C. The remaining interest, 240, is a non-deductible personal expense. For more information about deducting interest, see chapter four of publication five, three, five. The chapter explains the following items. So if you look at that publications, the exciting material that you can expect to find, interest, you can deduct. Interest, you cannot deduct. How to allocate interest between personal and business use. Limitation on business interest, when to deduct interest, the rules for below market interest rate loans. So you can imagine situations where loan structures are set up more unusually. So in other words, you can imagine a situation for like a loan for example, where someone just says we want you just to pay back so much money over the next five years or something and they don't actually give you the interest rate and it's not structured in the loan. But you know interest must be involved because there is a time value of money. So then you might have to do something like impute the interest or figure out how much of the payments should be attributable to interest. So most loans, if you go through a standard financial institution will of course be standardly structured, most of the time installment type of loans. But you can imagine many different ways for a loan to be structured. And sometimes the form and the, there's a substance informed kind of problem with regards to how the structure has been set up substantively and how what it actually is in reality. For example, a loan being set up so they don't mention interest for example, but in reality there has to be some calculation for time value of money. If it was a market transaction between two self-interested and informationally informed people. So this is generally a loan on which interest is charged or on which interest is charged as a rate below the applicable federal rate.