Interest Write Offs For a Home Business

So often we become so busy with operating our home business that we overlook other non-operating aspects. It is very important to focus on making sales, advertising and promotion, delivering our products, product development, and the like. At the end of the day, there often is not any time left for the mundane tasks of bookkeeping, accounting, tax planning and other record keeping. All though are critical to your financial success. Most business owners are pleasantly surprised at the benefits that they enjoy when the time is spent to do these things correctly. Take debt management for example.
For financial planning purposes, there are two kinds of debt; good debt, and bad debt. When money is borrowed with the purpose of earning income and the interest is tax deductible this is good debt. Borrowing money to pay for purchases such as vacations, vehicles, recreational items where the interest is not tax deductible is bad debt. Please note that this is a discussion on good debt versus bad debt and not on the appropriateness of any particular investment or purchase.
In our accounting business, I had a client very pleased that the $100,000 debt he incurred to purchase his business was paid off. On the surface, this may be a good thing, but in the background were over $60,000 of outstanding personal loans for a recreational vehicles. The $4,200 (at a 7% interest rate) interest that this individual will continue to pay on his personal loans is not tax deductible. If he had paid off his personal loans and had $60,000 remaining on his business debt, the $4,200 would have been tax deductible. Assuming a marginal tax rate is 25%, the tax savings would have been $1,050! This tax savings could then be used in any way the individual sees fit.
A similar situation would exist where a person was investing in real estate, the stock market, or other types of passive income potential. It is a better tax and wealth building strategy to use whatever funds are available to pay off personal debt where the interest is not tax deductible. Then you can borrow money for the investment you were going to make anyway and then be able to use the interest expense as a deduction from your income. The tax savings to you can be substantial.
Your banker should have no problem with what you are doing and many are likely doing this sort of arrangement themselves already. For tax write off purposes, it doesn't matter what the loan collateral is, it does matter what the actual item purchased is. So if you put up your personal debt-free car as collateral, the interest can still be deductible if used for appropriate business or other investments.
As we can see from this example, it is important to consider the tax consequences of our debt related decisions. Simply put, personal debt where the interest is not tax deductible should be paid off first. Then, a decision to pay off business or investment debt must include consideration for alternate uses of the money. This can only be done on an individualized basis and a financial advisor or accountant should be brought into your team.
Debt management for tax purposes is only a portion of what should be examined. Other considerations, not discussed include this like debt servicing abilities, ratios, cash flows, debt vehicles, and perhaps most important is the individuals attitude toward debt.
The benefits of including tax planning with your debt planning is one indication of the importance of paying attention to all aspects of a home business, even the so-called mundane tasks. If you are not an expert yourself or don't have time to become an expert, then hire an advisor to your business team and focus on making the profits.
Mark Styranka writes on a variety of topics primarily relating to small business. To learn more, Mark recommends that you visit:http://www.MajecAccounting.com http://www.MajecAccounting.com/blog
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