Is a loan origination fee tax deductible?

Nancy from Seattle, WA. sent us an email and asked us, “I’m about to start preparing my taxes. I recently got a loan and was wondering, is a loan origination fee tax deductible?”

A loan origination fee is also known as an underwriting, administrative, or processing fee. The lender charges the borrower the loan origination fee when the borrower begins the loan application process. This fee is a service charge. It is usually one percent of the borrower’s loan amount. The fee covers the administrative cost of doing business with a lender. Depending on where the loan is filed, local regulations may or may not allow this fee to be tax deductible.

The Financial Accounting Standards Board (FASB) Statement No. 91, applies to all types of loans. It discusses the correct way to account for nonrefundable fees and indirect costs associated with leasing. Statement No. 91 states that commitment and loan origination fees are included with interest revenue and should be recognized as an adjustment to income over the life of the loan using the interest method.

In regards to qualified education expenses, the loan origination fee must be used for money, not property or services provided by the lender, to be deductible as interest. The Internal Revenue Service (IRS) states that loan origination fees treated as interest accrues over the term of the loan. In addition, the IRS states that borrowers were not required to report loan origination fees on loans made before September 1,2004 on Form 1098-E, the Student Loan Interest Statement. If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any method to allocate the loan origination fees over the term of the loan.