Typically, the repayment of a business loan is not tax deductible, but the interest accrued on the loan will usually be tax deductible. Repayment of a business loan will not be counted as income towards your taxes.
If you are looking for a way to trim your business tax obligations, there are ways to cut back on the taxes owed for the interest you pay on your business loan.
Are business loan payments tax deductible?
In short, business loan payments aren’t tax-deductible. When a business loan is received by a company, it’s not included as taxable income. In turn, when that loan is repaid, you are not able to deduct loan principal payments. You are simply paying back the money you borrowed, not the income spent.
However, you may still be able to make some deductions. Interest paid or accrued on your business loan is tax-deductible in most cases.
Let’s say you took out a small-business loan and your monthly payments are $1,200. If $840 of your payment went to pay down the principal, that means you pay $360 each month in interest on your business loan. Only the $360 would be eligible to deduct as a business expense.
Business loan interest deductions
To deduct your loan interest from your taxes, you must prove that you’re legally liable for the loan debt and have proof of repayment. You also need to show that you have a true debtor-creditor relationship with the lender. If you only paid a partial amount of the business debt, you cannot make deductions for the full amount paid.
The loan funds also must 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 aren’t tax-deductible:
- Interest on loans for overdue taxes or tax penalties unless you are a C-corporation.
- Interest paid using a second loan from the original lender.
- Interest for $50,000-plus loans borrowed on a life insurance policy for business owners or employees.
In some cases, you can deduct interest on personal loans if the money was used for business purposes.
Loan repayment isn’t tax-deductible, but what you used the loan funds for might be. If your loan was used to purchase new equipment, real estate or other select reasons, you may be able to deduct those items as business expenses on your taxes.
Business loans typically fall into two categories: working capital and fixed assets. Fixed assets are generally financed through short-term debt. Working capital is typically financed through long-term debt. Working capital refers to loans used for everyday operation costs such as:
- Debt payments
Fixed assets include tangible items such as:
- Office furniture
- Office or shop equipment
- Construction costs
- Building purchase or remodel
No matter the type of business loan you receive, keep detailed records and copies of all paperwork to give to your tax preparer.
How to find the best business loan
- Interest rate: Securing a lower interest rate will save you considerable money over the life of your business loan.
- How much you borrow: Regardless of the reason for your business loan, it’s important to calculate how much you need to borrow upfront.
- Repayment terms: How long do you want or need to spend paying off your business loan?
Many lenders allow you to prequalify for a business loan with just a soft credit pull, which doesn’t have a negative impact on 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’s unlikely that it will be counted as income because you have to repay the amount you borrow. The most common exception to this is if you negotiate with a lender or creditor to reduce your debt. You will owe taxes on any debt that is forgiven.
Do you have to pay back SBA loans?
The Small Business Administration (SBA) offers several types of business loans. While the SBA offers some debt relief to businesses impacted by Covid-19 through the CARES Act, SBA loans typically need to be repaid. The good news is they usually come with long repayment terms between 10 and 25 years. Also, if you fail to repay an SBA loan, the lender may recover 50 to 85% of the outstanding balance from the SBA.
Is a small business loan an installment or a revolving line of credit?
A small business loan may be an installment loan or a revolving line of credit. With an installment loan, you get a lump sum of money upfront with payments typically due monthly. A revolving line of credit is a bit more flexible because you can borrow as much or as little as you’d like up to a set credit limit and pay it back as you go.
The bottom line
While you can’t deduct your loan repayment, you also won’t be charged taxes on the loan amount anyways. And, the ability to deduct interest paid could lighten your tax burden. Plus, there’s a chance that you can deduct purchases or operating expenses related to the loan.
Don’t let the fact that you can’t deduct loan payments on your taxes deter you if taking out a business loan is the right course of action for your company. Business loans can help your company purchase equipment, expand operations or increase its working capital.