What expense category is Bank Loan Origination Fees?

When a business takes out a loan or a mortgage to finance its operations or purchase property, there are often upfront costs in addition to the interest payments. These costs, commonly referred to as loan origination fees, commissions, or abstract fees, are a necessary component of securing financing.

A common and significant tax error is to deduct these fees as a business expense in the year they are paid. However, the IRS treats the costs of obtaining a loan as a capital expenditure that must be deducted over the life of the loan. This guide will clarify the correct tax treatment for these fees, ensuring your business remains compliant with tax regulations.

Bank Loan Origination Fees Category

Bank loan origination fees are not a currently deductible business expenses. Instead, they are a capital expenditure that must be recovered over the life of the loan.

IRS Publication 535 states that certain expenses you pay to obtain a mortgage or loan cannot be deducted as interest. These expenses, including mortgage commissions and other fees, are capital costs that must be amortized over time.

Important Considerations When Classifying Loan Origination Fees

The key to handling these costs is to understand that they are part of acquiring a long-term financial instrument, rather than a day-to-day operating expense.

Capitalize, Do Not Expense

You cannot deduct loan origination fees in the year you pay them. They must be capitalized, meaning they are recorded as an asset on your balance sheet.

Amortization Over the Life of the Loan

Once capitalized, these costs must be deducted in equal amounts (amortized) over the life of the loan. For example, if you pay a $3,000 origination fee for a 10-year business loan, you would generally deduct $300 each year for 10 years.

Distinction from Interest Payments

It is crucial to distinguish between the origination fee and the interest you pay on the loan.

• Origination Fee (Amortized): The cost to get the loan.
• Interest Payments (Deductible as Interest): The cost to use the money you borrowed. These are deducted separately as an interest expense.

Tax Implications and Recordkeeping

The tax treatment of loan origination fees requires capitalization and amortization, rather than a standard expense deduction.

How to Report the Deduction

The annual amortization deduction for your loan origination fees is calculated and reported on Form 4562, Part VI, Amortization. The total amortization deduction from this form is then carried to your main business tax return (e.g., Schedule C, Line 13).

What Records to Keep

You must maintain meticulous records to substantiate the loan's cost. Your records should include:

• The loan agreement.
• The loan settlement statement clearly details the origination fees, commissions, and other charges.
• Proof of payment for these fees.

How Fyle Can Automate Tracking for Loan Origination Fees

Fyle helps you capture and organize the significant, one-time costs of securing a loan, providing a clean record for your accountant to set up the amortization schedule.

• Centralize Loan Documents: Attach the loan agreement and settlement statement directly to the expense record in Fyle.
• Capture the Initial Cost: Instantly capture the payment for the origination fee, whether paid by check or wire transfer.
• Categorize for Capitalization: Code the fee as a capital asset to signal to your accountant that it requires amortization.
• Automate Your Accounting: Fyle syncs the capitalized cost to the correct asset account in QuickBooks, Xero, NetSuite, or Sage Intacct.