The What and Why of Title Loans
Lending solutions definitely aren't something to rush into, especially if you aren't familiar with the nuances and distinctions that make each option attractive. As desperate as the situation may be, it's worth stopping to ask what you're getting into so you can build your loan plan around your needs. Some of the questions you might ask include legal implications; interest rates; collateral requirements; and in the case of this article, whether acquiring any particular type of loan will affect how you report your income and deductions to the IRS.
In case you're new to the concept, title loans are a type of secured lending solution, meaning that a form of collateral is used to secure the guarantee that you'll pay it off. As you might expect, the size of the loan that you'll be allowed to take out is contingent upon the value of the collateral offered. In the process for getting a title loan in particular, you need to temporarily relinquish rights to a motor vehicle that's legally registered to your name and has been fully paid off. Rather than claim the vehicle itself to anchor the guarantee, the lending agency will instead secure the legal representation of the vehicle — the title. Naturally, a more valuable motor vehicle (be it car, van, truck, motorcycle or boat) will yield a higher potential loan amount.
Contractually speaking, the title can only be manipulated within the limits defined by the terms and conditions that you agree to when carrying out the loan. Those terms and conditions have certain legal restrictions that vary by state, but generally speaking, no distributor of title loans can just seize the vehicle the moment they have the title — rather, they normally have to wait until you've allowed your loan payments to fall more than 30 days delinquent before the necessary legal range of motion opens up to allow repossession. What most title loan firms will end up doing instead is encouraging you to refinance the loan in an effort to hold on to the vehicle itself and buy time to pay the rest of it off. In truth, these firms have less to gain by seizing the vehicle than they do by extending the payment plan.
Title loans are an excellent short-term solution to getting a leg-up on expenses should you have a less-than-awesome credit score to your name and no other effective means of procuring four-figure sums of financial go-juice. The flexibility of their plans and relatively unrestricted nature of the collateral exchange on top of the absence of credit checks in any format (or at least in any effectual capacity) makes title loans a formidable alternative to the usual payday, cash advance or unsecured lending solutions that you may have heard about.
The IRS, Title Loans and You
One of the questions that you may have asked already is, "Are car title loans tax deductible?" Unfortunately, the answer to that is a plain and simple no. There are no ordinary circumstances where any aspect of such a loan can be cited as justification for a tax deduction or credit. On a bittersweet note, that caveat isn't exclusive to title loan resources in particular — actually, no personal lending solution inherently comes with that benefit. The result would be the same if you took out a payday, cash advance or signature loan all the same.
There's an exception to this rule, however: If you take out a personal loan to support business expenses, then you may get a break from the IRS. This also applies to the usage of credit cards for such expenses, since credit cards are technically a type of on-hand loan. Either way, any time you borrow money from an institution that legally lends it to you (even title loans), you can cite evidence that this money was used to support the growth of a business interest when justifying a tax deduction.
Examples of loan-bound business expenses that you can claim tax deductions on include:
• Purchasing a company vehicle, with the amount deductible being contingent upon what portion of the vehicle's usage is actually for business purposes
• Claiming a property on which your business takes place in some form, be it an office or manufacturing center
• Resources that are essential for the business-relevant functionality of said vehicle or property, such as a GPS stand for road travel or office chairs and desks
• Utilities and upkeep of your business assets, such as electricity and running water for the facilities in which your business operations take place
• Financial investments toward stocks and other ventures where the revenue gained, if any, would be put toward the business itself
What this means is, if you're a business owner asking the original question — "Are car title loans tax deductible?" — the new and improved response is, "Maybe." There are additional exceptions to the rule, such as using a loan for investments in partnerships, limited liability corporations (LLC) or S corporations. Generally speaking, you should confer with a tax professional to flesh out the details on these exceptions and the strings attached to each, as the rules can be rather complex.
The reason for these exceptions isn't as flippantly arbitrary as you might expect. The IRS encourages expenditures that generate income for the simple fact that income equals more tax payments. Money that sinks into anything less than a productive investment is of no benefit to the IRS, so income that's spent to that effect is given no breaks or exceptions. To wrap up the meaning of this, we'll put it simply: If you carry out a title loan for the purpose of paying off a business expense in any format, then yes, you may claim a deduction on the loan interest.
The Home Equity Option
Another way to cite a deduction is to use home equity as your line of credit when paying something off. While the expense doesn't necessarily have to be business-related, you do have to already own a home and qualify for a second mortgage. In this case, the equity of your property serves as the collateral to secure the loan, which can be itemized and broken down to claim deductions on a Schedule A tax form.
Home equity loans can almost be thought of as a different type of title loan, using the amount of your home's mortgage that's already been paid off as the collateral against the amount that you're able to borrow. As mentioned earlier, the amount that you can borrow will be contingent upon the value that's already been paid off. While it's not an option that everyone would be willing or able to pursue, it's the only non-business alternative that allows you to claim a deduction against loan interest.
To revisit the question: Are car title loans tax deductible? Yes, they can be. However, you must prove that you're handling the money in the context of business expenses in order to claim your deductions. If you're looking to take out a loan for another purpose, the only option that will cut you some slack with the IRS is by using the value of your home instead.