If you have taken out a business loan or plan to do so in the future, you can’t write off your business loan repayment on your taxes. However, that doesn’t mean you don’t have some options to trim your tax obligations. Depending on what the money was used for, your small-business loan could create other opportunities to deduct business expenses.
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
You must prove that you’re legally liable for the loan debt and have proof of repayment to deduct your loan interest. You also need to show that you have a true debtor-creditor relationship with the lender. The money can’t come from a friend or family member unless you have a signed promissory note with the necessary details.
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 for loans to pay your taxes or fund a retirement plan.
- Interest for $50,000-plus loans 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.
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. Working capital refers to loans used for:
- Seasonal financing
- Export costs
- Revolving line of credit
- Business debt refinancing
Fixed assets include tangible items such as:
- Office furniture
- Office or shop equipment
- Construction costs
- Real estate purchases
- Building remodeling
No matter the type of business loan you receive, keep detailed records and copies of all paperwork to give to your tax preparer.
How do you find the best business loan?
A small-business loan is a powerful tool even if you can’t deduct loan repayment. To find the best business loan for you, consider the following factors:
- 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. In most cases, you will have to pay them back. The good news is they usually come with long repayment terms of up to 10 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. 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 up a credit limit.
The bottom line
While you can’t deduct your loan repayment, the ability to deduct interest paid could lighten your tax burden somewhat. 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.