If you have a business, there are two ways you might be able to deduct loan fees.
First, if you own a business and have a business-related loan, you can deduct any fees you pay to reduce your interest rate. Second, if you pay a business loan off early, you can deduct any penalties or bonuses that your financial institution charges you for this early pay-off. (The fee or penalty can be treated as prepaid interest that you deduct over the remaining original term of your loan.)
For example, if the term of your loan is four years and in the second year you pay a fee to reduce your interest rate from 5% to 4%, you can treat this fee as a prepaid expense and deduct it over the remaining term of the loan.
Fees Deductible over Five Years
You can deduct certain fees you incur when you get a loan to buy or improve your business property. These fees include:
- application, appraisal, processing, and insurance fees
- loan guarantee fees
- loan brokerage and finder’s fees
- legal fees related to financing
You deduct these fees equally over a period of five years, regardless of the term of your loan. For example, if your loan term is seven years, you still deduct the amount over five years.
You need to adjust the fee if the period of your loan is fewer than 12 months. (Ask us if you need help with this.)
If you prepay your loan before the five years are up, just deduct the remaining fees in the year you pay off the loan.
Questions? Send a quick email to Rita and her staff.