How does interest deduction work?

Corporate interest deduction is a method of reducing taxable income by deducting the cost of interest on loans. By using this technology, companies with loans can optimize their tax planning. In short, if your business has paid interest on debts, such as business loans or credit card debt, those costs can be deducted from your total taxable income, provided certain requirements are met.

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Which companies are entitled to interest deductions?

Most companies can make interest deductions as long as:

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• The loan is taken in the name of the company.
• All interest expenses and liabilities are correctly documented and reported in the company's accounting records.
• The loan is used to finance operations or investments in the company.

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Understanding the specific rules and regulations is important, so hiring an expert in accounting or tax law may be a good idea.

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Can interest deductions be adjusted?

When we talk about adjusting interest deductions, it is relevant to emphasize the importance of ensuring that your accounting and tax bases are correct from the start. Adjustment involves adjusting the preliminary tax, which may also include adjusting planned interest deductions. By discussing with your finance department or your accounting consultant, you can ensure that all interest deductions and tax payments are optimized for your business.

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How is interest income different from interest deductions?

It is also important to understand the difference between deducting interest expense (interest deduction) and taxing interest income. Interest income, that is, money the company earns by, for example, having money in a savings account, is taxed as business income. At the same time, interest expenses, money the company pays in interest on its loans, can be deducted from taxable income under certain conditions.

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How much can you deduct?

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First of all, in order to make deductions, you need to have a negative interest account, which you calculate by taking the interest income minus the interest expenses. To then calculate the size of the interest deduction, one can use two methods, the EBITA model or the simplification rule.

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EBITA

Basically, the interest deduction is calculated through the EBITA model by taking your interest expenses - interest income x 30%. However, to the full extent of the model, you also need to take into account wine tax, depreciation and provisions and returns to accrual funds.

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The explanatory rule

As the name suggests, this model is much easier to calculate your interest deduction through. Under the rule, one is allowed to make deductions on negative interest accounts up to 5 million. If your company has a negative net interest, i.e. where expenses are greater than income, you are entitled to deductions, as long as the net income is not greater than SEK 5 million. If the simplification rule is applied in group companies, the ceiling of 5 million applies to all companies within the group.

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Apportioning the interest deduction correctly

How to distribute the interest deduction in accounting can be a tricky process that often depends on the structure of the company and the type of loan taken. It is common for companies to distribute the interest deduction across different areas of activity or products, based on where the debts and expenses have occurred. Enlisting the help of an accounting specialist may be wise here, to ensure that the allocation is correct and in line with the current regulatory framework.

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Frequently Asked Questions Interest Deduction

1. Is there a limit to how much you can make in interest deductions?

Yes, there are special rules and limits on how much companies are allowed to deduct in interest charges. These rules can be complex and based on a range of factors, including company size, indebtedness ratio, and more.

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2. Can all types of companies make interest deductions?

Broadly speaking yes, but there are different rules that apply depending on company shape and size. Exactly how these rules look and are applied can vary, so it is recommended to consult a tax expert for detailed guidance.

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3. Do you have to deduct interest yourself?

No, you don't necessarily have to do it yourself. In fact, many companies choose to hire accounting firms or finance departments to handle such tasks because of its complexity and to ensure that everything is handled according to current laws and regulations.

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4. Is it possible to change interest deductions retrospectively?

Yes, it may be possible to change interest deductions retrospectively by making a supplemental tax return. However, it is important to consult a tax expert to understand the specific rules around this and to be sure that any necessary corrections and adjustments are implemented correctly.

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Summary

Having a solid understanding of how interest deduction works and how it can be applied within your business is vital to effective tax planning and financial stability. If interest deduction and tax planning are done correctly, it can result in significant financial savings and increased financial flexibility for your business. By combining internal knowledge with external expertise, you can ensure that your business is as tax-efficient as possible and that you don't miss out on important deduction opportunities.

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