Student loan payments and the related interest have special tax treatments depending on your tax entity type.
If you're a sole proprietor OR file your business profit in 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 up for its employees to pay for up to $5,250 of student loans during any given 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 prevented from a number of fringe benefits because the IRS deems you as having too much financial power within the company. This would give you an inequitable advantage to the average US taxpayer.
- Student loan payments made by your S corp 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.