There are many types of loans to help with various finance purchases. If you want to purchase a home, you take out a mortgage. If you want to buy a car, you secure financing from a bank or credit union. When going to college, there are options for low interest federal loans. When you need money for things that do not fall neatly into a category like those above, a personal loan may be your best option.
While loans such as home mortgages and student loans have tax implications, personal loans generally do not. However, did you know there are cases where personal loans can affect your taxes? Depending on how you use and repay the loan, the effects can be good or bad.
If you have a business and use all or a portion of a personal loan to pay for business expenses, you may be able to deduct the interest of that loan as a business expense on your taxes. Keep in mind that if you use only 50% of that loan toward your business, you can only write off 50% of the interest.
Cancellation of the Debt (COD)
A loan is a debt and not considered income, therefore it does not need to be reported on your taxes. HOWEVER, if you default on that loan and your lender issues a cancellation of debt, you will receive a 1099 from your lender. That 1099 is also filed with the IRS. This means that the money you received and did not pay back is now considered income and come tax season, you’ll be paying taxes on it. Not including it in your tax filing can cause tax problems for you down the road and no one likes to be in trouble with the IRS!
While mortgage loans and student loans are eligible for tax deductions, personal loans generally are not. Similar to using your personal loan on a business that you own, if you can demonstrate that you used the loan to make an investment, the interest on the loan may be eligible for a deduction against any investment income that you earn.
Looking for the best personal loans but don’t know where to start? If you are in need of a personal loan in Texas for either personal or business, Guarantee Loan has 11 locations around Texas ready to serve.