Editor's choice: First Down Funding business loans
- No prepayment penalties
- Competitive rates
- Works with bad credit and most industries
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Your business is getting off the ground or expanding, and you need the financing to back it up. But how does that financing affect your already complicated taxes? Explore the differences between a business and personal tax return, what counts as taxable income and what to deduct as business expenses.
Not usually. In fact, most loans are generally not considered taxable income because it’s money that you’re paying back. While there are exceptions, those exceptions apply to loans that are different from typical business loans from banks or online lenders.
The main exception is if some or all of your debt is forgiven, the amount that gets forgiven becomes taxable income. So even though you didn’t pay taxes on it when you received the funds, the act of forgiveness changes it from a loan to income.
The short answer is yes. You can typically deduct interest paid on business loans used solely for business purposes. Specific situations may arise in which the entirety of the amount borrowed isn’t used for business expenses. In these cases, interest paid on the amount used for personal purchases isn’t deductible.
Partially. A full loan repayment isn’t considered a business expense because the principal amount — the amount borrowed outside of interest — isn’t a cost to your business. It’s simply money you received and then paid back. However, the interest is considered deductible because it isn’t part of the original amount borrowed.
The shift from filing personal taxes to filing business taxes can be a shock the first time around. A variety of different forms can apply depending on whether you’re considered a C or S corporation, a general partnership owner or a nonprofit. If you’re a sole proprietor, the process is slightly more distilled to reporting your earnings on your 1040.
Sole proprietor or otherwise, you’ll need to keep track of additional deadlines. Tax deadlines are among the biggest ones to watch for. Even if you’re owed a return at the end of the year, estimated taxes that have gone unpaid come with a penalty.
Looking for more deductions. Consult a tax specialist to find out if your business could qualify for one of the following deductions.
A lot can happen over a year, especially if your business is young. You may even find that you don’t have all of the funds needed to cover your taxes owed. Should you owe money to the IRS that you can’t immediately repay, you can take a few steps to minimize the financial impact it has on your business.
Your first option is to contact the IRS directly. You may be able to set up a payment plan, which can reduce or eliminate possible penalties that come with not paying the owed amount.
You may also be able to take out a tax debt loan. Tax loans can reduce the likelihood of you becoming personally liable for your business’s debts — and, importantly, help you avoid penalties. In some cases, lenders even help you by providing a specialist to navigate the IRS.
Business loans can be useful tools for creating cash flow, buying equipment and maintaining supplies. When you’re paying one off, you can likely deduct the interest you pay from your taxes.
There are always exceptions when it comes to taxes. So you may want to consult with a tax professional if you’re unsure about the validity of a deduction.
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