I was recently researching the tax treatment of loan origination fees for a client, and found almost all the search terms I was using returned only information on personal mortgage loans, not business loans. With a decent amount of searching, Icame across a few nice articles that clearly spell out the tax treatment versus the financial accounting (GAAP) treatment of these fees, so I am sharing them here in hopes that when you go searching for the same info (as a business owner or accountant), you’ll find them all here together, in this nice little spot.
To clarify, there are different types of loan fees at closing— so, find this part out first — as that’s the key to how they’re treated.
First up, The Balance(a personal finance site that has a pretty decent “Small Business” section)discussesDeducting Interest Expenses on Your Business Taxes:
For mortgages on business property, you may end up prepaying interest from the settlement date to the closing date, as part of your closing costs.
The IRS says that when you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year.
You may not deduct interest that must be capitalized, that is, interest that is added to the principal balance of a loan or mortgage. This interest expenses must bedepreciated along with the other costs of the business asset.
For sole proprietors and single-member LLCs, show these expenses in the “Expenses” section of Schedule C on Line 16. Note that interest expenses are divided between mortgage interest and all other interest expenses.
For partnerships and multiple-member LLCs, show these expenses in the “Other Deductions” section of Form 1065
For corporations, show these expenses in the “Other Deductions” section of Form 1120.
Meaden & Moore’s blog does a really nice job of explaining — through an example that culminates in a journal entry — the accounting treatment (Generally Accepted Accounting Principles, or GAAP) of not only how to amortize these fees over the life of the loan, but why (the matching principle).
These costs should be recorded as an asset and the related periodic expense should be charged to amortization expense.If these costs were expensed in full at the time of payment, expense for that period would be artificially higher than normal and potentially misleading.Utilizing the matching principle will allow a Company to align this expense with the term of the loan.
However, I only found one article that discussed what I was really looking for: the comparison of tax vs. GAAP rules for period expensing or capitalization/amortization of loan origination fees.
Loan Origination: Getting Tax and Financial Accounting to Mesh, by CFO.com’s Accounting & Tax department, offers an excellent general explanation of why tax and GAAP (financial statement accounting) systems differ.
We have seen that, with respect to many items of income and expense, tax accounting differs, diametrically, from financial accounting. This divergence, of course, is not surprising in light of the fact that the fundamental goals of each system also diverge.
Financial accounting has as its underpinning the doctrine of conservatism such that, wherever possible, net income is understated through the mechanism of accelerating expenses and deferring income. The fundamental objective of the tax accounting system, as we are all aware, is revenue collection such that the system strives to enhance net (or taxable) income and, to this end, income items are accelerated while expenses, wherever possible, are deferred. With each system, however, ”matching” (of revenues with the expenses incurred to produce such revenues) is also advertised as a central tenet. But frequently, this particular objective is sacrificed on the altar of the larger objectives — conservatism and revenue enhancement.
In the case of the bank in the particular example they use, the fees were deductible as a period expense for tax purposes (as opposed to being amortized, which is the requirement for GAAP) because the bank’s loan marketing activities were a core activity of its day-to-day business.
That case stands, broadly, for the proposition that expenses must be capitalized if they provide benefits that extend beyond the year in which such expenses are incurred.
Which means that in most situations, for both financial statement and tax purposes, these fees need to be written off over the period of the loan — but there are exceptions for tax purposes if the activities are central to daily operations.
FAQs
Generally, the IRS allows businesses to deduct any fees paid for originating a loan that are ordinary and necessary expenses. This includes fees for services such as credit reports, appraisals, document preparation, loan packaging, and title searches.
Are loan origination fees tax-deductible for a business? ›
Loan originating fees charged on a loan you take to purchase a business property can't get deducted. You'll have to add the costs to the value of the property, which will be deducted with depreciation.
Are loan origination fees capitalized or expensed? ›
The loan fees are amortized through Interest expense in a Company's income statement over the period of the related debt agreement.
Is the mortgage interest 100% tax-deductible? ›
The answer: It depends. Mortgage interest is only deductible when the loan — even if it's a second mortgage — is used to buy, build or substantially improve your home. So if you used your HELOC or home equity loan for a remodel, the interest should be deductible.
What is the origination fee for a small business loan? ›
Origination fees
Sometimes, the lender may call them administrative fees. Origination fees are usually a percentage of the borrowed amount, about 2 percent to 5 percent. You can either reduce the amount of money you receive or increase your loan's starting balance to pay the fee.
Can I write off loan payments as a business expense? ›
Interest you pay on business loans is usually a currently deductible business expense. It makes no difference whether you pay the interest on a bank loan, personal loan, credit card, line of credit, car loan, or real estate mortgage for business real property.
Is principal on a business loan tax deductible? ›
Business loan payments aren't tax-deductible. A business loan is not included as taxable income when a company receives a business loan. In turn, when that loan is repaid, you cannot deduct principal payments. You are simply paying back the money you borrowed, not spending money in any way you can write off.
Do loan fees have to be amortized for tax purposes? ›
The fact that loan expenses are a cost of the loan rather than a cost of the property is reflected in cases involving business or investment property where these expenses may be deducted, In these cases the courts prescribe that the expenses be amortized over the life of the loan; and if the mortgaged property is sold ...
What counts as loan origination fees? ›
A mortgage origination fee is an upfront fee charged by a lender to process a new loan application. The fee is compensation for executing the loan. Loan origination fees are quoted as a percentage of the total loan, and they are generally between 0.5% and 1% of a mortgage loan in the United States.
Do you depreciate or amortize loan fees? ›
Why Do We Amortize a Loan Instead of Depreciate a Loan? Loans are amortized because they are intangible. A loan doesn't deteriorate in value or become worn down over use like physical assets do. Loans are also amortized because the original asset value holds little value in consideration for a financial statement.
Key Takeaways. A business interest expense is the cost of interest on a business loan used to maintain business operations or pay for business expenses. Business interest expenses may be deductible if the use of the loan qualifies under tax law.
How do I know if my mortgage interest is tax deductible? ›
The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and isn't deductible. Main home. You can have only one main home at any one time.
What closing costs are tax deductible IRS? ›
Typically, the only closing costs that are tax deductible are payments toward mortgage interest, buying points or property taxes. Other closing costs are not.
Are business loan origination fees deductible? ›
Origination fees on a business loan may qualify as interest expense and be tax deductible. Consulting a tax professional can help you determine if the full amount is deductible or if you'll need to prorate the amount over the term of the loan.
Can I negotiate loan origination fee? ›
Loan origination fees are common costs that cover your lender's work to process your loan. Origination fees are typically just one percent of your loan balance and they're often negotiable. Talk with your mortgage lender about their origination fee and plan to pay this extra closing cost before you move in.
How much are federal loan origination fees? ›
Federal Loan Origination Fee Calculator
The origination fees for loans disbursed after October 1, 2020 are: 1.057% Subsidized and Unsubsidized Loans. 4.228% Parent PLUS and Graduate PLUS Loans.
Are borrow fees tax deductible? ›
No, Short Borrow fees are investment expenses. Prior to the Tax Cuts and Jobs Act of 2017, this was deductible on line 28 of Schedule A under miscellaneous itemized expenses. This is no longer deductible under current tax law, as an itemized deduction.
Are bank fees tax deductible for a business? ›
Monthly bank fees are considered an ordinary and necessary expense and, therefore, tax deductible.
Can you write off mortgage as business expense? ›
Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements.
Are SBA loan fees tax deductible? ›
No, SBA loan fees are not tax deductible. However, you should be able to deduct SBA loan interest from your taxes.
