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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.
• Machinery.
• 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.

Wells Fargo is ending a popular consumer lending product, angering some of its customers, CNBC has learned.

The bank is shutting down all existing personal lines of credit in coming weeks and has stopped offering the product, according to customer letters reviewed by CNBC.

The revolving credit lines, which typically let users borrow $3,000 to $100,000, were pitched as a way to consolidate higher-interest credit card debt, pay for home renovations or avoid overdraft fees on linked checking accounts.

“Wells Fargo recently reviewed its product offerings and decided to discontinue offering new Personal and Portfolio line of credit accounts and close all existing accounts,” the bank said in the six-page letter. The move would let the bank focus on credit cards and personal loans, it said.

Wells Fargo CEO Charles Scharf has been forced to make difficult decisions during the coronavirus pandemic, offloading assets and deposits and stepping back from some products because of limitations imposed by the Federal Reserve. In 2018, the Fed barred Wells Fargo from growing its balance sheet until it fixes compliance shortcomings revealed by the bank’s fake accounts scandal.

The asset cap has ultimately cost the bank billions of dollars in lost earnings, based on the balance sheet growth of rivals including JPMorgan Chase and Bank of America over the past three years, analysts have said.

It has also affected Wells Fargo’s customers: Last year, the lender told staff it was halting all new home equity lines of credit, CNBC reported. Months later, the bank also withdrew from a segment of the auto lending business.

With its latest move, Wells Fargo warned customers that the account closures “may have an impact on your credit score,” according to a “Frequently Asked Questions” segment of the letter.

Another part of the FAQ asserted that the account closures couldn’t be reviewed or reversed: “We apologize for the inconvenience this Line of Credit closure will cause,” the bank said. “The account closure is final.”

Sen. Elizabeth Warren, a frequent critic of the banking industry, denounced Wells Fargo’s decision to pull back the credit lines.

Simplify offerings

Wells Fargo didn’t directly answer questions as to what role, if any, the Fed asset cap played in its latest move.

The bank gave this statement: “In an effort to simplify our product offerings, we’ve made the decision to no longer offer personal lines of credit as we feel we can better meet the borrowing needs of our customers through credit card and personal loan products.”

After publication of this article, a Wells Fargo spokesman gave additional remarks: “We realize change can be inconvenient, especially when customer credit may be impacted,” the bank said, adding that it was “committed to helping each customer find a credit solution that fits their needs.”

Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments at a fixed rate, according to the statement. When it was offered, the credit lines had variable interest rates ranging from 9.5% to 21%.

The move is a strange one given the banking industry’s need to boost loan growth.  

After a burst of commercial lending during the early days of the pandemic, loan growth has been hard to muster. Corporations have used money raised in stock and debt issuance to retire bank credit lines, and consumers stuck at home had fewer reasons to use credit cards.

In fact, last year big banks experienced the first aggregate drop in loans in more than a decade, according to Barclays bank analyst Jason Goldberg. Of the four largest U.S. banks, Wells Fargo saw the worst decline.

After banks saw that borrowers held up far better than they had initially feared, the industry recently began marketing new credit cards with large sign-on bonuses in an effort to boost lending.

Making the switch

Wells Fargo doesn’t disclose how many customers used the credit lines it is eliminating. It had $24.9 billion in loans in a category called “other consumer” as of March, which was 26% lower than the year-earlier period.

One customer said the change is prompting him to switch banks after more than a decade with Wells Fargo. Tim Tomassi, a Portland, Oregon, programmer, said he used a personal line of credit linked to his checking account to avoid expensive overdraft fees.

“It’s a bit upsetting,” Tomassi said in a phone interview. “They’re a big bank, and I’m a small person, and it feels like they’re making decisions for their bottom line and not for customers. A lot of people are in my position, they need a cushion every once in a while from a line of credit.”

Tomassi said he is considering opening an account at Ally or Chime, banking players that don’t charge overdraft fees.