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Schedule C · Line 16

Interest Expense

The cost of borrowing money is tax-deductible. But the IRS has strict 'tracing rules' you need to know.

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The Deductibility of Debt

Line 16 is split into two parts: Mortgage Interest (16a) and Other Interest (16b). The most important concept to understand here is Interest Tracing.

Key Insight
The deductibility of interest depends on what you did with the money, not what assets secure the loan.

Example: If you take out a second mortgage on your home but use 100% of the cash to buy equipment for your business, the interest is deductible HERE on Schedule C (Line 16b), not on your personal Schedule A.

Lines 16a and 16b

Mortgage interest vs. all other business debt

Line 16a: Mortgage Interest

Interest paid to banks for a mortgage on real property used in your business (e.g., a warehouse or shop).

  • Must be reported on Form 1098.
  • If paid to an individual (seller financing), you must list their SSN/EIN.

Line 16b: Other Interest

Interest on all other business debts.

  • Business Credit Cards.
  • Equipment Loans & Lines of Credit.
  • SBA Loans.

Loans from Family and Friends

Borrowing from "The Bank of Mom & Dad" is common, but the IRS scrutinizes it heavily. If you don't follow formalities, the IRS will reclassify the "loan" as a "gift" (no interest deduction for you) or "equity" (no deduction).

1. Written Promissory Note:

Must state the loan amount, interest rate, maturity date, and payment schedule. Signed by both parties.

2. Market Rate Interest:

You must charge at least the Applicable Federal Rate (AFR). "0% interest" loans are a red flag.

3. Actual Payments:

You must make payments according to the note. You can't just accrue interest forever.

Taxstra CPA Tip
If you pay more than $600 in interest to an individual (like a parent) in a year, you MUST file Form 1099-INT. Failing to file this form essentially disallows your deduction in an audit.

Audit Traps

Watch Out
Scenario: You use a personal card for business and personal items. You carry a balance.

The Problem: When you make a payment, does it pay off the business or personal charge? The rules are complex. Most CPAs will refuse to calculate the split, costing you the deduction. Solution: Get a dedicated business card.
Watch Out
Scenario: You put your home mortgage interest on Line 16a because "I work from home."

This is a guaranteed error. Home mortgage interest belongs on Form 8829 (Home Office) or Schedule A. Line 16a is only for mortgages on SEPARATE business property.

Frequently Asked Questions

Yes, if the card is used 100% for business. If you mix personal/business, you must calculate the exact portion of interest attributable to business purchases, which is very difficult due to how payments are applied.

Back to Schedule C Hub · See also Get Audit-Ready Financials

Questions About Business Debt?

Properly structured business debt can fuel growth and reduce taxes. Talk to a Taxstra CPA about your loan structure.

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Disclaimer: This content is educational and does not constitute individualized tax advice. Tax rules change; verify all figures with a qualified CPA before filing. For personalized guidance, book a consultation.