Is interest tax deductible?
Yes — when borrowed money is used for business. Interest on business loans, lines of credit, and business credit card balances is deductible as an ordinary business expense. The key principle is the tracing rule: what the money was used for determines whether the interest is deductible — not the type of loan or lender.
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On this page: Short answer · Who this applies to · The tracing rule · Interest types · When it's deductible · When it's not deductible · Mixed-use debt · Schedule C · Example · Records · Specific lookups · FAQ
Short answer
Yes, for business-use borrowing. Interest is deductible when the borrowed funds are used to earn business income. Personal interest is generally not deductible. The deductibility follows the money — not the loan account.
Report business interest on Schedule C, Line 16b (Other Interest). Mortgage interest on a business property goes on Line 16a.
FreshBooks — Track loan interest and business expenses automatically
Categorize business loan interest, credit card charges, and financing costs throughout the year so your Schedule C Line 16 deductions are organized at tax time.
Who this typically applies to
- Self-employed individuals and freelancers using business credit cards or personal cards for business purchases
- Small business owners with business loans, lines of credit, or equipment financing
- Contractors and tradespeople financing tools, vehicles, or materials for business use
- Any business owner carrying a balance on a business credit card from month to month
Employees cannot deduct interest on personal loans used for work-related expenses under current tax rules.
The tracing rule: Why the use of funds matters
The IRS uses a tracing rule to determine whether interest is deductible. Under this rule, interest is classified based on how the borrowed funds were actually used — not based on the type of loan, the lender, or the account the money came from.
How the tracing rule works in practice
- Business loan → business expenses: Interest is fully deductible as a business expense
- Business loan → personal spending: Interest on that portion is personal — not deductible as a business expense
- Personal credit card → business purchases: Interest on the business charges is deductible as a business expense
- Personal credit card → mixed charges: Only the interest attributable to business charges is deductible
- Home equity loan → business use: Interest may be deductible as business interest (not mortgage interest) if funds are traced to business use
The tracing rule means a personal credit card used exclusively for business purchases generates fully deductible interest. A business loan partially used for personal spending generates only partially deductible interest.
Interest types: Deductibility at a glance
| Interest type | Deductible? | Where to report |
|---|---|---|
| Business loan interest | Yes — fully deductible | Schedule C, Line 16b |
| Business line of credit interest | Yes — fully deductible | Schedule C, Line 16b |
| Business credit card interest | Yes — fully deductible | Schedule C, Line 16b |
| Personal credit card — business charges only | Business portion only | Schedule C, Line 16b |
| Equipment financing interest | Yes — business use portion | Schedule C, Line 16b |
| Mortgage interest — business property | Yes — fully deductible | Schedule C, Line 16a |
| Mortgage interest — personal home | Itemized deduction only | Schedule A (not Schedule C) |
| Personal loan interest | No | Not deductible |
| Auto loan — personal vehicle | No (personal use) | Not deductible |
| Student loan interest | Personal deduction only | Form 1040, Schedule 1, Line 21 |
When interest is tax deductible
- The borrowed funds were used for business operations — purchasing inventory, equipment, supplies, or covering operating costs
- You can trace the funds to business use through bank records or statements
- The interest is actually paid during the tax year (cash-basis taxpayers deduct when paid)
- You have loan statements or credit card statements showing the interest charged
- The debt is not reimbursed by a client, employer, or other party
When interest is not deductible
- The borrowed funds were used for personal spending — personal purchases, vacations, personal bills
- You cannot trace the use of the borrowed funds to business activity
- The interest is on a personal loan or consumer debt with no business-use tracing
- The loan funded tax-exempt investments — interest on money borrowed to purchase tax-exempt bonds is not deductible
- Business and personal borrowing are commingled without records supporting allocation
Deducting interest on mixed-use debt
When borrowed funds are used for both business and personal purposes, only the business-use portion of the interest is deductible. The allocation follows the proportion of how the funds were actually spent.
Mixed-use debt allocation example
- Total loan: $20,000
- Used for business inventory: $15,000 (75%)
- Used for personal expenses: $5,000 (25%)
- Total interest paid in the year: $1,200
- Deductible business interest: $1,200 × 75% = $900 → Schedule C, Line 16b
- Non-deductible personal interest: $300
Keep bank statements or a spreadsheet showing how the borrowed funds were disbursed between business and personal use. This documentation supports your allocation if questioned.
Where does business interest go on Schedule C?
Business interest expenses go on Schedule C, Line 16 (Interest), which has two sub-lines:
- Line 16a — Mortgage interest paid to banks: Interest on a mortgage for a business property (not your home, unless you have a home office using the actual expense method, in which case home mortgage interest flows through Form 8829 instead)
- Line 16b — Other interest: All other business interest — business loans, lines of credit, business credit cards, equipment financing, and any personal credit card interest traced to business use
Do not put personal credit card interest on Line 16b unless you have documented that the specific charges generating the interest were business expenses.
Example: Annual interest deductions for a freelance web developer
Example: Freelance developer carrying balances on business and personal cards
- Dedicated business Visa card — all charges are business: interest paid in year = $340 → Line 16b ✓
- Business line of credit for equipment purchase: interest paid = $780 → Line 16b ✓
- Personal Mastercard — 70% of charges are business: total interest paid $200 × 70% = $140 → Line 16b ✓
- Personal car loan (vehicle 60% business use, actual expense method): interest $600 × 60% = $360 — note: this goes on Line 9 (Car and Truck), not Line 16b
- Personal student loan interest: $450 → not deductible on Schedule C (personal deduction on Schedule 1)
- Total Schedule C business interest (Line 16b): $1,260
At a 22% effective tax rate, $1,260 in interest deductions saves approximately $277 in taxes. Vehicle loan interest is a separate calculation under actual vehicle expenses — it does not go on Line 16b.
What records to keep
- Loan agreements and credit card statements showing interest charges
- Bank statements showing how borrowed funds were disbursed and used
- Year-end interest statements from lenders (Form 1098 for mortgage interest)
- For mixed-use debt: a record showing the business vs personal allocation of the borrowed funds
- For personal credit cards used for business: statements with business charges highlighted or categorized
TurboTax Self-Employed — Claim business interest deductions on Schedule C Line 16
TurboTax Self-Employed guides you through Schedule C Lines 16a and 16b, separates business interest from personal interest, and handles mixed-use debt allocation.
FAQ
Is business interest tax deductible?
Yes. Interest on money borrowed to fund business activities is generally tax deductible as an ordinary and necessary business expense. This includes interest on business loans, business lines of credit, and credit card interest on business purchases. Report on Schedule C, Line 16b. The deduction requires that you can trace the borrowed funds to business use.
Is personal interest tax deductible?
Generally no. Interest on personal loans, personal credit card balances, auto loans for personal vehicles, and consumer debt is not deductible as a business expense. Mortgage interest on a personal home may be deductible as an itemized deduction on Schedule A — but this is a personal deduction, not a business one.
Does it matter what the loan was used for?
Yes — the use of the borrowed funds determines deductibility, not the type of loan or the lender. This is called the tracing rule. If you borrow from a business loan account but use the funds for personal spending, that interest is not deductible. If you use a personal credit card for a business purchase, that interest is deductible for the business-use portion.
Is credit card interest tax deductible for business?
Yes, for the business-use portion. Interest on a dedicated business credit card is fully deductible. Interest on a personal credit card is deductible only for the portion of the balance attributable to business purchases. Keep statements showing which charges were business-related. Report on Schedule C, Line 16b.
Can I deduct interest on a mixed-use loan?
Yes, but only the business-use portion. If you borrowed $20,000 and used $15,000 for business and $5,000 personally, 75% of the interest is deductible as a business expense. Keep documentation showing how the borrowed funds were allocated between business and personal use.
Where does business interest go on Schedule C?
Business interest goes on Schedule C, Line 16 (Interest) — specifically Line 16b for most business interest including loans, lines of credit, and credit card interest. Mortgage interest on a business property goes on Line 16a. Personal mortgage interest goes on Schedule A, not Schedule C.
Looking for other deductible expenses? See the full Expense Deductibility Guide.
Last reviewed: April 14, 2026