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 money you borrowed, not income spent.
That doesn’t mean that there aren’t deductions you can still make. Interest paid or accrued on your business loan are tax deductible in most cases.
Business loan example
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.
Deducting business loan interest
Keep in mind you must prove that you’re legally liable for the loan debt and have proof of repayment in order 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.
What if the business loan was used to purchase equipment?
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.
- Constructions 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 to 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.
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.