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Tax implications of business loans explained
Save time and effort by knowing what to claim when it comes to your business loans.
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.
Is a business loan considered taxable income?
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.
Can I deduct interest I paid on a business loan?
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.
Is loan repayment considered a business expense?
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.
Top business expenses you can write off on your taxes
10 commonly reported business expenses
- Home office
- Office supplies
- Utilities
- Entertainment
- Conferences and trade shows
- Auto
- Travel
- Marketing
- Internet and email
- Employee salaries
10 overlooked business expenses
- Healthcare tax credit
- Education
- Insurance
- Nonpenalty bank service charges
- Business credit card interest
- Professional fees
- Retirement tax credit
- Tax preparation fees
- Startup costs
- Employee gifts
Personal tax return vs. business tax return
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.
Personal tax forms you might have to file
- Form 1040. The standard form for filing your personal income taxes.
- Form 1040A or 1040EZ. Simplified versions of 1040, but with restrictions on who can file them.
- W-4. A form that lets your employer withhold taxes from your pay.
Business tax forms you might have to file
- Form 1120. The standard form for reporting business income taxes.
- Form 1120S. A tax form for reporting shareholder income, losses and dividends.
- Form 1065. A form that allows you to report business partnership profits, losses and deductions.
Tax implications of personal loans
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Top small business expenses that are tax deductible
Looking for more deductions. Consult a tax specialist to find out if your business could qualify for one of the following deductions.
- Home office. If you’re working from home in a room that’s only used for your business, you can usually deduct home-related expenses for that room — rent or mortgage payments, utilities and more.
- Office supplies and equipment. In this case, equipment doesn’t just mean heavy machinery. You can deduct any type of technology your business uses, including new computers, scanners and copiers on top of the usual office supplies.
- Software. Your business can write off software programs you bought or subscribed to like Microsoft Office or Adobe Creative Suite.
- Mileage. If your business involves a lot of traveling by car, you can write off some of those expenses like mileage, tolls and parking, though you’ll need to keep careful track during the year.
- Health insurance. If you’re self-employed, you can deduct what you pay in health insurance premiums up to your business’s net profit for that year. Your spouse’s and children’s health insurance premiums might also be deductible.
- Wages for employees under 18. You might be able to deduct the salaries you pay to children under 18 as a business expense.
I have business tax debt. What can I do?
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.
Bottom line
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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