Taxes and funding
Usually yes, when the money is used in the business. What decides it is where the money went, not what the loan is called. Here are the general rules, with a worked example.
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Updated October 13, 2026 · Merchant Fund Express
Interest on money borrowed for business use is generally a deductible business expense. The IRS traces the loan by how the proceeds were spent. If the funds paid for inventory, payroll or equipment, the interest follows that use. If part of the money paid for something personal, the interest on that part is generally not deductible.
A few conditions sit underneath this: you must be legally liable for the debt, both sides must intend it to be repaid, and it must be a real debtor and creditor relationship.
An auto repair shop borrows $50,000. It spends $40,000 on a lift and diagnostic equipment and $10,000 on a personal vehicle. Over the year it pays $4,000 in interest.
| Use | Amount | Share | Interest |
|---|---|---|---|
| Business use | $40,000 of $50,000 | 80% | $3,200 generally deductible |
| Personal use | $10,000 of $50,000 | 20% | $800 generally not deductible |
Keep the money in the business account and keep receipts. Clean tracing is the easiest way to support the deduction.
All figures in worked examples are illustrations of the arithmetic, not offers or quotes. Real terms depend on your file and the funder.
Larger businesses face a cap on how much business interest they can deduct each year under section 163(j). Most small businesses are exempt: the IRS says a business that is not a tax shelter and whose average annual gross receipts over the prior three years are at or below an inflation-adjusted threshold is generally not subject to the limit. The IRS lists that threshold as $32 million for 2026 (as of October 2026).
If your business is anywhere near that size, the calculation, the elections available and recent law changes are a conversation for your CPA, not a web page.
If you are comparing a factor rate with an interest rate, read factor rate vs interest rate first so you compare the cost, not just the label.
This page explains general principles only and is not tax advice. Talk to your CPA about your situation.
If the deduction is part of how you are weighing a term loan or line of credit, check the tier requirements and then apply. The application starts with a soft credit pull.
Generally only the interest on money used in the business. Interest on the share used personally is generally not deductible.
Most small businesses are exempt if their average annual gross receipts over the prior three years are at or below the inflation-adjusted threshold, which the IRS lists as $32 million for 2026. Confirm with your CPA.
Often they are spread over the loan term rather than deducted at once. Your CPA will choose the right method.
It depends on how the agreement is booked. Bring the signed contract to your CPA.
No. It explains general principles. Your tax professional should review your own return.
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