While the economy is showing signs of improvement, many small business owners are still finding it difficult to secure financing through commercial lenders.  As an alternative to a business loan, many business owners are refinancing and/or taking out home equity lines of credit on their personal residences as a method to obtain the funds needed to maintain their small businesses. 

In most cases, any interest incurred on a home mortgage/home equity line of credit would be an itemized deduction, taken on Schedule A of the individuals Form 1040.  In the case of a small business owner using the funds for business purposes, however, interest tracing rules allow the taxpayer to deduct interest expense on their Schedule C.  By electing to deduct the interest paid as a business expense, the individual will effectively reduce their self-employment income, self-employment taxes and adjusted gross income.  Treating the interest expense as a business deduction rather than an itemized deduction can be far more advantageous for the taxpayer in lowering income tax liability.  This election is made for the current tax year and all subsequent tax years and can only be revoked with IRS consent. 

If you have questions about any of this information please do not hesitate to call our office at 253-833-5304 or contact us at info@fb-cpa.com