If you have taken out a business loan or plan to do so in the future, you cannot deduct your business loan repayment from your taxes. However, that doesn’t mean you don’t have options to reduce your tax obligations. Depending on the use of the money, your small business loan could create additional opportunities to deduct business expenses.
Are Business Loan Payments Tax Deductible?
In short, business loan payments are not tax deductible. When a business loan is received by a business, it is not included in taxable income. In turn, when this loan is paid off, you cannot deduct the loan principal payments. You are simply paying back the money you borrowed, not the income spent.
However, you can still make certain deductions. Interest paid or accrued on your business loan is tax deductible in most cases.
Suppose you took out a small business loan and your monthly payment is $ 1,200. If $ 840 of your payment went to pay off the principal, that means you’re paying $ 360 in interest each month on your business loan. Only the $ 360 would be eligible for the deduction as a business expense.
Interest deductions on commercial loans
You must prove that you are legally responsible for the loan debt and have proof of repayment to deduct the interest on your loan. You must also prove that you have a genuine debtor-creditor relationship with the lender. Money cannot come from a friend or family member unless you have a signed promissory note with the necessary details.
Loan funds must also be spent on something for your business, not just kept in a bank account, to be eligible for interest deductions.
There are a few types of interest that are not tax deductible:
- Interest on loans for overdue taxes or tax penalties, unless you are a C.
- Interest on loans to pay your taxes or fund a retirement plan.
- Interest on loans over $ 50,000 borrowed on a life insurance policy for business owners or employees.
In many cases, you can deduct interest on personal loans if the money was used for business purposes.
The loan repayment is not tax deductible, but what you used the loan funds for could be. If your loan was used to purchase new equipment, real estate, or other reasons, you may be able to deduct these items as business expenses from your taxes.
Business loans generally fall into two categories: working capital and fixed assets. Working capital refers to loans used for:
- Seasonal financing
- Export costs
- Revolving line of credit
- Refinancing of corporate debt
Fixed assets include tangible items such as:
- Office furniture
- Office or store equipment
- Construction costs
- Real estate purchases
- Building renovation
No matter what type of business loan you receive, keep detailed records and copies of all paperwork for your tax preparer.
How to find the best business loan?
A small business loan is a powerful tool even if you cannot deduct the loan repayment. To find the best business loan for you, consider the following factors:
- Interest rate: Obtaining a lower interest rate will save you a lot of money over the life of your business loan.
- How much you borrow: Whatever the reason for your business loan, it is important to calculate in advance how much you need to borrow.
- Repayment Terms: How much time do you want or need to spend on paying off your business loan?
Many lenders allow you to prequalify for a business loan with just soft credit, which doesn’t negatively impact your credit score. Use our business loan calculator to determine the right course of action.
Frequently Asked Questions
Is a business loan considered income?
If you take out a business loan, it is unlikely to be counted as income because you have to repay the amount you borrow. The most common exception to this rule is if you are negotiating with a lender or creditor to reduce your debt. You will owe taxes on any canceled debt.
Do you have to repay SBA loans?
The Small Business Administration (SBA) offers several types of business loans. In most cases, you will have to pay them back. The good news is that they usually come with long repayment terms of up to 10 years. Additionally, if you do not pay off an SBA loan, the lender can recover 50-85% of the outstanding balance from the SBA.
Is a small business loan a payment or a revolving line of credit?
A small business loan can be an installment loan or a revolving line of credit. With an installment loan, you get a lump sum of money up front. A revolving line of credit is a bit more flexible because you can borrow as much or as little as you want up to an established credit limit.
The bottom line
Although you cannot deduct your loan repayment, the ability to deduct the interest paid could ease your tax burden somewhat. In addition, you may be able to deduct any purchases or operating expenses related to the loan.
Don’t let the fact that you can’t deduct your loan payments from your taxes deter you if taking out a business loan is right for your business. Business loans can help your business buy equipment, expand operations, or increase working capital.