It is possible to get a tax deduction on a line of credit or expenses related to a line of credit. Unfortunately tax law is so convoluted and ever-changing that it is often impossible to tell if you can get such a deduction until you’ve actually submitted your tax return.

Generally, a line of credit itself and the funds you get from it will not be tax deductible. Although it must be noted that some home equity lines of credit and the interest on some home equity line of credits is tax deductible.

Whether or not your home equity line of credit is tax deductible is determined by your income. Unfortunately the requirements for tax deductibility on a home equity line of credit change almost every year. This means that you will have to check with the IRS or a tax professional every year to see your home equity line of credit is deductible. 

Line of Credit as a Business Expense

Lines of credit, the interest charged on them and the expenses related to lines of credit can sometimes be deducted as business expenses. If a line of credit is used for business purposes such as buying equipment or supplies, it can probably be written off as a business expense.

The interest on a line of credit may also be considered a business expense. Expenses incurred in getting a line of credit if they can be recorded are definitely a business expense.

The money you get from a line of credit is debt and not income so it is not taxable in the United States. Money spent to pay a line of credit off; however, is a business expense that can be written off.

Always keep a record line of credit payments and expenses related to a line of credit. This way you can them to verify the expenses for tax purposes.

Line of Credit as a Loss

Another way to write off a line of credit could be as a loss. If your business takes in less money than it makes it is operating at a loss. This can be good for you because a loss is tax deductible.

The money spent on line of credit repayment, line of credit interest and other expenses related to a line of credit can be written off as a loss. That could help a business get a tax deduction.

The business owner will have to have proof of the line of credit loss. This means the business should save all documents related to the line of credit expenses. A good way to save space and have these documents readily available would be to scan them and save the scanned documents on a computer or disk as PDF files. Scanning could also reduce mailing and fax expenses because PDF files can quickly be e-mailed to the IRS or tax professionals.

Tax software like Turbo Tax and tax professionals can show a business how to write a line of credit off as a loss. If a large amount of money is involved in the loss it’s probably a good idea for the business to consult a tax attorney or a tax professional. Many former IRS agents work as tax consultants and provide excellent advice.

Line of Credit and Tax Audits

A business owner should always be very careful when trying to use a line of credit as a loss or expense for a deduction. Improperly submitting a line of credit for a deduction can lead to a tax audit by the Internal Revenue Service (IRS) or state tax agencies.

A tax audit is a very costly and irritating experience that most businesses will want to avoid. The best way to avoid a tax audit is to consult a tax professional before using a line of credit as a deduction.