Can I deduct interest on a loan to buy a business?

Deductibility is one of the larger differences between an asset purchase and a share purchase and it is rarely raised early enough to influence the structure. Over a five-year loan the difference is not marginal.

The test is what the money was used for

The general requirement is that the borrowed funds were used for the purpose of earning income from a business or property. That makes tracing the use of funds the whole exercise — and it is why mixing acquisition borrowing with personal borrowing in one facility creates a problem that is tedious to unpick and easy to avoid at the outset.

Asset purchase: usually the cleaner position

Where the operating company borrows to buy assets it will use in its own business, the connection between the borrowing and the income is direct. The interest is an expense of the business that earns the income, which is the straightforward case.

Share purchase: it depends who borrowed

An individual borrowing personally to buy shares is in a different position from a holding company borrowing to buy the same shares, and from the operating company itself. The income the shares are expected to produce matters, and so does whether interest can be matched against it. This is the case where advice before signing changes the outcome, because the structure cannot be rearranged afterwards.

Keep the paperwork that proves the use

A deduction claimed years ago may need to be supported on a reassessment. Keep the loan agreement, the direction of funds and the closing statement showing what the money bought, and keep the acquisition facility separate from any personal borrowing. Documentation is cheap at the time and impossible to recreate later.