Are business loans tax deductible?
Yes, they can be.
Here’s how to leverage business loans to reduce your tax liability and save money.
Business Loan Tax Implications
The money that you receive from a business loan is not tax deductible, and the principal amount that you pay back after you’ve received a fast business loan is not tax deductible either.
However, loan interest on your business loans can be. Generally, business loan interest is tax deductible when:
- You’re working with recognized lenders for financing, such as the Small Business Administration for an SBA loan. This may make it easier to get the deductions you’re hoping for when it comes time to calculate your business tax returns and SBA loans.
- You’re using the loan proceeds you’ve received for business expenses only. Using business loans for personal purposes or sitting on funds rather than spending them will disqualify you from being able to claim deductions. You can’t treat it as a personal loan.
If you want to take advantage of tax deductions on business loan interest, keep in mind that:
- You’ll need to keep extensive documentation to ensure you’re claiming the right deductions and are able to provide proof of deductible loan interest payments to the IRS. This will be vital to your tax return.
- Loan interest related to refinancing or loan origination fees associated with your loans may not be fully deductible or deductible at all. There may not be any tax deduction available for certain types of business loans or every interest payment on financing.
- There are limits to how much a business can claim in deductions, for the most part. Take care to brush up on tax laws each tax year to ensure tax compliance for deductible loan interest payments. A tax professional can help you with your tax return.
Business Loan Tax Strategies
The two best approaches when you want to leverage your business loans for tax deductions are to be smart about which loans you choose and to deduct as many eligible expenses as you have once you’ve spent your money.
For example, knowing that only certain loans are eligible for business loan interest deductions and which will provide you with full deductions will help you select loan programs that help you save the most money through loan interest tax deductibility.
Once you’ve reached your tax deduction limit with the IRS or the limit for specific loans, turn your attention to your business spending. Can you claim deductions for the new equipment or software you purchased? Can you claim for operational costs?
You might not have another business loan interest deduction. But your business loan can still help you save money and offer a tax benefit beyond deductible interest.
The better your tax return strategy, the easier it will be to maximize your savings once tax season rolls around. You should also look into other obscure tax laws, no matter if they involve tax deductions or otherwise.
One great place to start is whether you have to pay tax on business credit card rewards.
FAQs
Is loan repayment a business expense?
Loan repayment is not considered a business expense in the eyes of the IRS. You’re repaying an outstanding debt for the loan amount in your loan agreement. These loan payments for borrowed funds aren’t the same as buying new equipment or investing in a fleet.
However, the loan interest that accrues on your business loan is considered a business expense for tax purposes, which makes it tax deductible.
Is a business loan considered income?
No, a business loan is not considered taxable income.
You’re not generating revenue as you would when you’re engaging in traditional business activities. You are borrowing money when you get a business loan, and then you have to pay those loan funds back.
Of course, this is good news. You don’t have to treat your business loan as taxable income and add more expenses on top of your loan payments.
Taxable income from a short term loan or long term loan could increase your tax liability. You just get to reap the rewards of a business loan interest deduction.
Are business loan principal payments tax deductible?
No, business loan principal payments are not tax deductible. Only the loan interest on your business loan is a tax deductible business expense. Make sure the only tax deduction you claim is related to business loan interest.
You won’t get a tax benefit with each principal loan payment.
