Student Loan Tax Benefits for Sole ProprietorsApril 21, 2023
A small business owner is responsible for all aspects of their business. One of the many tasks to handle is paying taxes for your self-employment in addition to regular income taxes. The amount you pay for these taxes is a percentage of your income. If you can reduce your income through deductions, you’ll owe less at tax time.
Small business owners with student loans often wonder, “Can I write off student loan payments as a business expense?” Keep reading to understand what you can and cannot deduct from your taxes.
Can I Write Off Student Loan Payments as a Business Expense?
Generally, student loan payments are not eligible as a business expense. For business expenses to qualify as a tax deduction, the expense must be “ordinary and necessary,” meaning the expense is common in your industry and appropriate for your trade or business type.
Some education expenses are tax-deductible. Self-employed individuals can deduct the cost of qualifying education costs as business expenses if the following requirements are met:
- Either your employer or the law requires the education to maintain your present salary, status, or job.
- The education maintains or improves skills needed in your current job.
These deductions are meant to be for education expenses you incurred during the tax year; existing student loans aren’t eligible. Neither federal nor private student loans qualify as business expenses.
However, you may be eligible for other tax deductions and credits, including the student loan interest tax deduction.
Tax Breaks for Small Business Owners
Although student loan payments aren’t tax-deductible as business expenses, sole proprietors may be able to take advantage of the following tax credits and deductions to reduce their tax bill:
Student Loan Interest Deduction
Available to sole proprietors and employed workers, the student loan interest deduction allows you to deduct the interest you paid toward your student loans during the tax year. This deduction reduces your tax liability, so your taxable income is lower.
The student loan interest tax deduction allows you to deduct the actual amount of interest you paid toward your loans during the tax year or $2,500, whichever is less.
The amount of the deduction is gradually reduced if your modified adjusted gross income (MAGI) is between $70,000 and $85,000 ($145,000 and $175,000 if you file a joint return). And you can’t claim the deduction at all if your income is $85,000 or higher.
Health Insurance Premiums
If you are self-employed, you can deduct the cost of your health insurance premiums whether or not you itemize your deductions.
However, you cannot claim the deduction if either you or your spouse were eligible to participate in an employer-subsidized plan.
Home Office Deduction
If you have a home office for your business, you can deduct a portion of your mortgage interest, insurance, utilities, and repairs costs. Under the simplified deduction, you can deduct $5 per square foot of the home used for business, up to a maximum of 300 square feet.
To qualify for the deduction, the space must be exclusively used on a regular basis for your business. If you work from the kitchen table or the office doubles as a guest room, you’re ineligible for the deduction.
Qualified Business Expenses Deduction
Although your student loan payments aren’t a business expense, you can deduct other business costs. For example:
- Space rentals: If you rent an office or manufacturing space, you can deduct the cost of your lease and utilities.
- Equipment and supplies: From computers to post-it notes, the supplies you use to run your business effectively are tax-deductible.
- Accounting services: If you hire a bookkeeper or accountant — or simply do it yourself with bookkeeping software — you can deduct the expense of those services.
- Subscriptions: If you subscribe to business publications, such as industry journals, you can deduct the cost of the subscriptions.
As a sole proprietor, you need to save money for retirement entirely on your own. If you have a qualifying retirement plan, such as a Simplified Employee Pension Plan IRA (SEP IRA). Your contributions to a SEP IRA are tax deductible up to the deduction limit.
If you travel as part of your job, such as attending conferences or meeting with clients, you can deduct The expenses must be ordinary and necessary — so trips to luxury spas may raise red flags — and you can’t deduct expenses that are lavish or extravagant.
For businesses that require you to drive for work, you may be able to claim a deduction for the car’s use and maintenance. For most vehicles, you can use the IRS’ standard mileage rate: for 2023, the standard mileage rate is 65.5 cents per mile driven for business use.
For a Limited Time: Employer Student Loan Repayment
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, employers can pay up to $5,250 toward an employee’s student loans, and the IRS will not charge federal income taxes on that amount.
As a sole proprietor, you can benefit from this perk by creating a student loan repayment assistance program and giving yourself up to $5,250 to repay your student loans.
As an employer, you may also benefit from a payroll tax exclusion, making this perk even more valuable to you as a business owner. To qualify, you must create a written employee assistance program plan. For more details, view the IRS guidelines.
This program is only available for a limited time. Currently, this provision expires at the end of 2025.
[Tip: Every business is different, so it’s a good idea to consult with a tax professional or certified public accountant to make sure you claim all of the available tax benefits and handle your business expenses properly. The IRS maintains a database of credentialed tax professionals you can use to find a tax expert near you.]
How to Save Money on Student Loans
Although your student loan payments aren’t deductible as a business expense, you can save money on your student loan repayment with the following tips:
- Claim other tax breaks: As a sole proprietor, you may be able to deduct other business expenses, such as your rent or supplies, as well as your health insurance premiums.
- Sign up for automatic payments: With some lenders, you can qualify for an interest rate discount by enrolling in automatic payments. Over time, that discount can help you save hundreds.
- Pay more than the minimum: Paying a little more every month — even just $10 or $25 — will reduce the amount of interest that accrues and allow you to pay off your debt faster.
- Consider student loan refinancing: By refinancing your student loans, you could qualify for a lower interest rate and save thousands. However, think twice before refinancing federal loans; once federal loans are refinanced, they aren’t eligible for federal benefits like loan forgiveness or forbearance.
Refinance Your Student Loans with ELFI
Although a student loan will not offer a business tax break, there is still a way to save money on student loans. Student loan refinancing is a wise financial move in many circumstances.
Student loan refinance benefits include:
- Reducing the interest rate on your loan
- Combining multiple loans into one
- Decreasing your monthly payment
- Saving thousands of dollars in interest costs
With ELFI, you can choose from variable or fixed-rate loans, and you can have up to 15 years to repay your loan. You can check your eligibility for student loan refinancing and see your potential savings by prequalifying online in minutes.*