Expert: Christine Janklow - 3/29/2009

Question
Hello.  I sure hope you can help me out here. My husband had a construction business (Sole Proprietor) for approximately 15 years.  Most years were profitable.  However, some years including 2005, 2006 and 2007 were not.  In an attempt to keep the business alive and pay off some business debt such as suppliers etc., my husband took out a $50,000.00 business loan in 2006.  Unfortunately in 2007 my husband was forced to dissolve his construction business.  The loan was spent on business bills and employee wages and we could not afford to take out another loan as it seemed like a futile attempt at this point.  We were blessed as within months he found a good trucking job as an employee.  We still owe $29,000.00 on the business loan and the annual interest on this loan is around $3,000.00 (he took a variable interest rate loan).  Since the business was officially closed as of December 31, 2007 and there is obviously no further income coming in from this business, are we able (and if so how) to take the interest expense as a tax deduction for 2008 and future years until the loan is paid off?  Every dime of the $50,000.00 loan was spent on business expenses. We do not want to file bankruptcy as this is the only debt we are left with regards to the business and are trying to keep a good credit history. I do not know how to file a Schedule C with zero income and a $3,000.00 business loan interest expense.  It is hurting us financially to make this payment each month (and will still be paying it for the next 4 years or so) along with the high rate of interest.  We may be able to refinance the loan at a lower rate of interest, but my main concern is how (if I can) to continue to expense the interest on the business loan when the business truly no longer continues to exist.  If you could "please" get back with me right away I would "really" appreciate it as we need to file our 2008 tax return soon. Thank you for your help.  Sincerely, Deborah Hardy

Answer
Deborah:
Thank you for your question. As I am not a tax professional, I can only comment regarding options to help ease the burden of your debt servicing. I recommend contacting a CPA, or even visit the IRS.gov website to learn more about corporate deductions. Your loan was primarily attached to your business, which is now insolvent. If you placed (likely) a personal guarantee the liability shifts to your husband. That said there may be a few things he can do to help ease costs on the loan:
1. Contact the bank to ask for - a) lower interest via hardship restructuring b) get another bank to assume (transfer balance) the loan at lower cost c) ask for forbearance for a time to help with monthly relief.
2. Settle the debt at a discount through debt negotiation. This is a more drastic means, but one that could save you years of servicing and thousands. Our firm specializes in this process, should you have interest in exploring - see my profile to contact.
I urge you to ask questions of the lender and really pronounce the reason you seek relief so they take action on your behalf. Please feel free to ask a follow up.

Respectfully,

Christine Janklow