Every business owner should know this tax hack!
Having personal debt can be problematic. But as a business owner, here is how you can make the interest TAX-DEDUCTIBLE.
By utilizing a personal line of credit for business expenses, a sole proprietor business owner can deduct the interest paid on the line of credit as a business expense.
This deduction reduces the business's taxable income, resulting in lower income tax.
Let's meet Sophie, a determined and savvy sole proprietor business owner in Montreal. Sophie owned a boutique art gallery called "Artisan Elegance," specializing in showcasing local artists' unique creations.
Sophie LOVED her business but always sought ways to optimize her finances. One day, while talking with her advisor, she heard about the Cash Damming tax strategy.
Being a business owner in the arts, she accumulated a lot of personal debt throughout her studies and from years of low-paid gigs during the early years of her career!
Enter the CASH DAMMING TAX STRATEGY:
Sophie CAN’T DEDUCT INTEREST FROM PERSONAL DEBT—but she CAN deduct interest from BUSINESS DEBT.
Sophie followed three steps:
1️⃣ She opened a sub-account in her line of credit for her business.
2️⃣ She used the business income to pay down her personal debt.
3️⃣ She then used her business sub-account in line of credit to pay for business expenses.
She gradually CONVERTED her existing PERSONAL DEBT (not tax-deductible) into BUSINESS DEBT (tax deductible)!
This helped reduce her overall tax liability. The debt already existed but now it allows her to reduce her taxable income. This allowed her to also PAYDOWN DEBT FASTER!
She had to carefully tracked her expenses and income to ensure she could efficiently manage her business operations and the debt.
By using our Conquest Planning software, we were able to create sustainable a debt repayment plan and we brain-stormed ‘what-if’ scenarios to ensure her debt could be managed given the unexpected!
