Take advantage of the tax deductibility of all financing costs
Debt interest is tax deductible under certain conditions. Find out under what circumstances this is possible and what you should be aware of.
- Debt interest is deductible if the liability is an operating debt.
- Private financing costs can be claimed only to a limited extent for tax purposes. The three-account model helps here.
- When using the three-account model, there are some things to consider, such as tax traps.
- Relevant is the time when interest was incurred and not when it was paid.
When are debt interest tax deductible?
Debt interest is always tax deductible if a liability for which you pay interest is a debt. This is the case if you finance the acquisition or production costs of assets and operating expenses.
The same applies if you provide your company with debt capital as liquid assets. By contrast, private financing costs can only be claimed to a limited extent for tax purposes. For this reason, it is therefore necessary to try to shift all private debt interest into the operational area, so that the accrued interest on debt can be deducted for tax purposes as operating expenses.
It is a taxable basically free, whether it finances its operation with equity or debt. Furthermore, there is no legal obligation stating that you must use operating income primarily to repay operating debt.
Therefore, if you repay a private liability either with a corporate current account loan and finance your personal expenses with credit, or if you use your income to repay your private liabilities and insist on the operational current account credit, there is no abuse of freedom of design.
Three accounts model
With the three-account model, you can achieve a tax deduction even if you buy a single-family home for your own use and finance the purchase price with a bank loan. In plain text:
- Account 1 represents the company account. You use this to record all operating income. But beware: This account must be kept exclusively on a credit balance basis.
- Account 2 also represents an operational account. This accounts for all operating expenses, ie you use credit in this account (credit account).
- Account 3 then handles only your private transactions.
You can now withdraw money from account 1 (credit account) and transfer it to your private account, account 3. If you make use of account 3 loans because, for example, you are financing the purchase of a private one-family house, you can repay this private loan (whose interest you can not deduct for tax purposes) by withdrawing account 1.
If you then manage all operating expenses via account 2, this account will inevitably generate a corresponding debit balance. However, since the credit draw on account 2 is clearly operational, you can deduct the interest on this as operating expenses tax deductible!
This will allow you to transfer all your private liabilities to the operational area, saving you a lot of taxes. If your tax office does not recognize your options, you should seek legal remedies to secure possible claims.
However lurk in the three-accounts model and some tax traps, but you can easily handle. For example, avoid a simultaneous rescheduling of the outgoing account as well as the repayment of private debts through withdrawals from the revenue account.
Arrange with your bank no compensation of credit and credit account. A compensation means that credit and credit account form a unit of interest. Rather, the accounts should be kept strictly separate.
Make sure that the operating revenue account is kept on a credit-only basis (account 1 should never be on target!). Also, do not cause transfers between the spending and receipts accounts, for example, if you accrue funds on the expense account accidentally, or if out-of-pocket expenses are posted to the revenue account. Because with such transfers, you clearly represent a relationship between the accounts.
Also, do not make over-large withdrawals of account 1 while borrowing for major operational investments, and do not direct withdrawals directly to a private loan account to pay off your private debts, but first post your earnings on your current account and then wipe them out from – at a later date – your private debt.
The date of origin of the debt interest
In order for you to be able to deduct interest on debt as business expenses, you, as a reporting trader, only need to know the period for which they accrued – and not when you paid them.
In plain English: If the bank calculates interest on you and does not charge it to you until 3 January of the following year, these interest rates still have to be deducted tax-deductible last year.
On the other hand, interest for the new year can not be deducted for taxation last year (even if it was paid at that time).
As a freelancer, however, the outflow principle applies, ie. Interest, discount and other financing costs are tax deductible only in the year in which they were actually paid. However, there is no period of max. Between the payment of the discount and the loan payment. 4 weeks, the discount may still be claimed for the past year.
When you create an income / surplus bill, you can deduct the discount in full as an operating expense at the time of retention, ie when the loan is disbursed. However, the tax authorities only accept a discount of max. 10% for a loan with a 5-year fixed interest rate.