Student loan payments and the related interest are subject to special tax treatment depending on your tax filing status.
If you're a Sole Proprietor OR file your business profit on your personal tax return:
- Payments that reduce the principal amount are never deductible.
- Payments towards student loan interest are deductible on Schedule 1, Part II, Line 21 of your personal tax return.
If your business is an S Corporation:
- You may have seen that companies can set up Student Loan Assistance Programs for their employees to pay up to $5,250 in student loan debt each year.
- Unfortunately, this is only available to regular employees. As an owner and employee of your S-Corp, you are considered a shareholder-employee.
- Shareholder-employees are denied certain fringe benefits because the IRS deems them to have too much financial power within the company. This would give you an inequitable advantage over the average US taxpayer.
- Student loan payments made by your S corporation will be considered Owner's Distributions. It's like you took the money out of the business and used it for personal items, in this case, student loan payments.