Tax deduction for business interest on a loan

[Kaleb Brown]

My Scorp during the year purchased a book clients from another business.  The sale was seller financed with a loan paying back the seller $262,964 along with $30,000 worth of interest over the loan length of 3 years. 

How do I list the loan under the business for taxes and deduct $10,000 worth of interest as an business deduction?

[DavidD66 · Accepted solution]

You bought an intangible asset that you need to set up as a Section 197 asset in your books.  You also need to set it up in TurboTax.  You will amortize the $262,964 over 15 years (180 months).  You will have a deductible amortization expense of $1,460.91 each month for 180 months.  You also have a loan for $262,964 which you need to set up in your books and the report the ending loan balance and interest expense in TurboTax.   Each payment you make on the loan will consist of two components, principal, which will reduce the loan balance, and interest expense, which will be a deductible expense on your tax return.  You will only be able to deduct the amount of interest you paid in 2024, not the entire $30,000.

To add your asset in TurboTax Business:

• Select the FEDERAL TAXES tab
• Select Deductions
• Click o Start next to Depreciation of Assets
• Answer "Yes" to "Any Large Purchases (Depreciable Assets)?"
• Select "Add an Asset"
• Enter a Description, date of purchase and % business use (should be 100%
• On the next screen: Describe This Asset" mark the option "Other"
• On the next screen "Tell Us a Little More" select "Amortizable intangible"
• Enter the amount you paid for the book of business - $262,964
• On the page with "What Kind of Intangible?" Select "197: Section 197 intangibles
• On the next page you will see your total Amortization Deduction for the year.

For your note payable, you will need to set that up in your accounting software (e.g. QuickBooks).  If you are not using accounting/bookkeeping software (and I strongly suggest you do) you will need to set up an amortization table to calculate the amount of principal and interest you paid during the year.  You will enter the ending balance of the note payable in your balance sheet in TurboTax. To enter your interest expense, go to Federal Taxes, Deductions, Business Expenses, Common business expenses, Interest expense. 

You can find a loan amortization table in Excel and online - just search "Loan Amortization Table".