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Dear Tax Talk,
If a husband has a 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
Dear 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.
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