How to account for closing cost on business loan refinancinig

## Accounting for Closing Costs on Business Loan Refinancing

**Understanding Closing Costs**

When refinancing a business loan, borrowers typically incur various closing costs. These costs are fees and expenses associated with the loan transaction, including:

– **Loan origination fees:** A percentage of the loan amount charged by the lender for processing and underwriting the loan.
– **Appraisal fees:** Costs associated with obtaining an appraisal of the property securing the loan.
– **Title fees:** Fees for title search, title insurance, and documentation preparation.
– **Recording fees:** Fees charged by the local government for recording the new loan documents.
– **Attorney fees:** Costs for legal services related to the loan transaction.
– **Third-party fees:** Charges for services provided by third parties, such as environmental reports or property inspections.

## Accounting Treatment of Closing Costs

The accounting treatment of closing costs for business loan refinancing depends on the nature of the costs.

**Capitalized Costs:**

– **Loan origination fees** and **appraisal fees** are considered capitalizable costs. They are added to the cost basis of the loan and amortized over the life of the loan.
– **Title fees** related to the acquisition of the loan are also capitalizable costs.

**Expensed Costs:**

– **Recording fees**, **attorney fees**, and **third-party fees** are considered expensed costs. They are recorded as expenses in the period incurred.

## Journal Entries

The following journal entries demonstrate the accounting treatment of closing costs:

**To capitalize loan origination and appraisal fees:**

“`html
Debit: Loan origination fees xxx
Credit: Loan payable xxx

Debit: Appraisal fees xxx
Credit: Loan payable xxx
“`

Read more  Who is eligible for florida black business loan program

**To record recording fees, attorney fees, and third-party fees as expenses:**

“`html
Debit: Expense account xxx
Credit: Cash xxx
“`

**Example:**

A business refinances its existing $100,000 loan with a new loan. The following closing costs are incurred:

– Loan origination fee: $2,000
– Appraisal fee: $500
– Recording fees: $150
– Attorney fees: $250

**Journal Entries:**

“`html
Debit: Loan origination fees 2,000
Credit: Loan payable 2,000

Debit: Appraisal fees 500
Credit: Loan payable 500

Debit: Expense account 400
Credit: Cash 400
“`

## Impact on Financial Statements

**Balance Sheet:**

– Capitalized closing costs (loan origination and appraisal fees) increase the loan payable balance.
– Expensed closing costs reduce the net income for the period.

**Income Statement:**

– Expensed closing costs appear as expenses on the income statement.
– Capitalized closing costs do not directly impact the income statement, but they reduce the net income gradually over the life of the loan through amortization.

## Tax Implications

For tax purposes, closing costs related to loan refinancing are generally treated as follows:

– **Capitalized costs:** Amortized over the life of the loan.
– **Expensed costs:** Deductible in the year incurred.

## Best Practices

To ensure proper accounting for closing costs, businesses should:

– **Review the loan agreement carefully** to identify all associated closing costs.
– **Document all closing costs incurred** with supporting invoices and receipts.
– **Classify closing costs correctly** as either capitalized or expensed costs.
– **Consider the tax implications** of closing costs.
– **Maintain accurate records** for future reference and potential audits.

Read more  What businesses qualify for imf loans

By following these best practices, businesses can ensure that closing costs are accounted for appropriately and have a clear understanding of their financial impact.

Leave a comment