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Company Mortgage - Can I write off Principal as a Business Expense?

Personal Finance & Money Asked on November 30, 2020

Our business purchased a home that is used as one of our business locations – employees working there are allowed to have room & board taken out of their payroll (pretax).

Question

If we use profits from the fiscal year to significantly pay down principal (10% of the current loan) before the end of our fiscal year are we able to use that as a write off? Alternatively, could we pay all of 2021’s mortgage payments as a way to write off money earned in 2020 ?

3 Answers

A capital outlay is money a company spends to either purchase a fixed asset or to extend its useful life. Fixed assets are those that appear on the balance sheet as property, plant and equipment, known as "PPE." Capital outlays are also commonly referred to as capital expenditures, or just "capex." Since capital outlays are essentially investments in the company, the accounting treatment of capex is different from that for operational expenses.
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Capital outlays are not treated as immediate expenses. Say your company spends $30,000 on a new truck. As far as accounting is concerned, your company has not surrendered any value. Before, you had $30,000 worth of cash. Now you have $30,000 worth of PPE. Your net assets remain the same. You will eventually report the cost of the truck as an expense; you just won't do it all at once. The truck has a finite useful life, so you'll gradually expense the $30,000 cost over that useful life, a process known as depreciation. Revenue expenditures, on the other hand, are expensed immediately. If an oil change for the truck costs $100, that gets reported as an immediate expense.

https://smallbusiness.chron.com/capital-outlay-65324.html

The purchase price of the building is not deductible immediately. Paying the mortgage down is just buying equity; that's not any more deductible than money you spend investing in the stock market is deductible. The interest on the loan, on the other hand, probably is deductible.

As gaefan said in a comment, the exact treatment is complicated: are you using cash or accrual? What depreciation applies?

Correct answer by Acccumulation on November 30, 2020

In general repayment of a loan does not count as an expense for tax purposes. This is because you have not "spent" money in an accounting sense. Instead you have reduced your cash assets by some amount, but also reduced your liabilities by the same amount. This is different from, say, buying advertizing or paying an employee salary, where the money is gone. In the same way when you took out the loan you did not have to pay tax on the money you received.

Answered by DJClayworth on November 30, 2020

You cannot deduct cost for a different period from your profit, unless the payment period at least overlaps with the current period.
In your case, if you have monthly mortgage payments, you could make a payment on that covers all Dec/31 - Jan 30 in the old year and deduct it, but not a payment that covers Jan/1 to Jan/31, no matter on which day you make that payment - it would simply be an accrual for next year.
If you have a mortgage contract where you pay for example an annual amount on Dec/15, you can deduct it all in the current period, even if the majority of the money is for the next period.

This is the same for any repeating payments, like software licenses, leases, etc.

If your business has a different fiscal year, adjust the dates in the example accordingly; either way, only payments that are at least partly for the current period can be deducted in the current period.

Answered by Aganju on November 30, 2020

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