taxes

Using a HELOC for a business?

George Saenzq_v2.gifDear Tax Talk,
If a husband has a home equity line of credit, or HELOC, of $200,000 under his name and wants to use it for the couple's LLC for business uses, what are the IRS rules regarding the tax deductibility of the HELOC's interest for such circumstances?
-- Tracey

a_v2.gifDear Tracey,
A married couple generally files a joint return. For the most part, the separate income and deductions of each spouse are commingled on a joint return so that one spouse's deduction becomes the deductions for both.

In other words, it doesn't matter that the HELOC is in the husband's name; it is just as deductible on the joint return as if it were in joint names. The law does not really distinguish between a HELOC or a regular mortgage. The general rule is that you can deduct as an itemized deduction the interest on up to $100,000 in debt used for any purpose, so long as it is secured by your primary residence or a second vacation home.

Interest paid on debt in excess of $100,000 may be deductible depending on the purpose of the loan proceeds. If you borrow the full $200,000 for business purposes, it becomes business interest. If you choose, you could deduct half as an itemized deduction and the balance against the business income. However, treatment as an itemized deduction will usually never provide a better tax benefit.

Where you deduct the interest depends on how the HELOC proceeds are put to use and whether the LLC files a separate return or if it is disregarded for tax purposes.

The interest the LLC pays on the HELOC would be considered income to you and the interest paid to the lender would be a corresponding offset. For example, assuming a separate return for the LLC, if the interest is $10,000, the LLC deducts $10,000, you record $10,000 in interest income and claim a $10,000 deduction on Schedule E, where you report the LLC's income.

Alternatively, if the LLC treats the interest payments as distributions to you, the $10,000 you pay the lender would still be similarly deductible on Schedule E. The bottom line in either situation is a net $10,000 deduction.

Since you want to be sure you don't raise any red flags with the IRS, I suggest you consult an accountant on how to properly treat the borrowings in your particular circumstances.

Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

News alert Create a news alert for "tax"

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed, 0 point 4.29%  0.01 4.30%
15 year fixed, 0 point 3.23%  0.06 3.29%
5/1 ARM 3.33%  0.12 3.45%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.38% --0.00 4.38%
50K FICO-based HELOC 4.11% --0.00 4.11%
100K FICO-based HELOC 3.96% --0.00 3.96%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.63%  0.10 2.73%
48 month used car loan 2.90%  0.07 2.97%
60 month new car loan 3.16%  0.06 3.22%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.90% --0.01 0.91%
2 Year CD 1.10%  0.02 1.08%
5 Year CD 1.81%  0.07 1.74%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.66%  0.01 15.67%
Cash Back Cards 16.36% --0.00 16.36%
Low Interest Cards 10.87% --0.00 10.87%
 
Next
DAILY TAX TIP NEWSLETTER

Get expert advice during tax season on tax preparation and tips for cutting your tax bill.

advertisement

Connect with us