Borrowing money for your business can affect how you file your taxes since your interest payments will be tax deductible. Find out more about how you can claim your loan interest on your tax return. And learn more about other tax deductions you can make to reduce the amount of money you owe at the end of the tax year.
Is a business loan considered taxable income?
Most business loans are not considered taxable income since you have to pay the money back to your lender. This means you won’t have to claim a business loan when you file your taxes, and the money you get from a business loan won’t be treated as income.
The main exception to this rule applies in cases where all or part of your debt is forgiven. At this point, any amount of debt that has been forgiven becomes taxable as income. This can happen if you’ve gotten debt forgiveness from a certain creditor or you’ve filed for a consumer proposal.
Is interest on a business loan tax deductible?
The short answer is yes. You can typically deduct interest you have paid on business loans used solely for business purposes. This includes business loans that are guaranteed by insurance policies, as long as the interest you paid is not added into the insurer’s base cost of the policy.
Specific situations may arise in which the whole amount borrowed isn’t used for business expenses. In these cases, the interest you pay on the portion of your loan that covers business expenses is eligible for business loan tax deductions, but the amount used for personal purchases isn’t deductible.
Is my full loan amount eligible for business loan tax deductions?
When you repay the principal on your loan, it isn’t considered a business expense and you can’t claim it towards your tax deductions. However, the interest you pay on your loan is considered a business expense. This is because you never received this money when you initially took out your loan.
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 business tax return
11 commonly known tax deductible expenses for your small business
Office supplies
Up to 50% of food, beverage and entertainment expenses (unless your business regularly provides these – i.e. a hotel or restaurant – or you already billed a customer or client for these costs)
Business software and applications including cloud computing service fees
Conference and convention fees
Membership fees for business-related organizations and publications
Utilities and phone costs
Advertising fees
Rent
Employees’ gross salaries
Repairs and maintenance done on business property
Motor vehicle expenses such as car insurance, gas and maintenance. Note that the vehicle itself is considered capital and is thus factored in as part of your business’s Capital Cost Allowance (CCA).
11 overlooked tax deductible expenses for your small business
Cost of supplies indirectly used to provide goods or services (such as medication used by a veterinary clinic or cleaning supplies used by a maintenance company). Do not include items such as desks, chairs and filing cabinets, because these are considered depreciable capital items – not expenses – and factor into your Capital Cost Allowance (CCA) instead.
Insurance premiums paid to insure buildings, equipment and machinery
Professional fees (such as legal, accounting and consulting fees)
Bad debts if you already included this amount as part of your business’s yearly income (must be claimed in the tax year in which the debts are written off)
Tax preparation fees
Startup costs (pre-operational expenses must be claimed in a year in which the business was operational)
Property taxes for your business’s land and building(s)
Employer contributions towards employees’ CPP, EI and Workers’ Compensation amounts
Top tax deductible expenses for your small business
Looking for more deductions? Consult a tax specialist to find out if your small business could qualify for any of the following tax deductible expenses for small business:
Home expenses(such as a heat, electricity, property taxes, mortgage interest and cleaning materials). If you work from home or have a space at home that’s used exclusively for business, you can claim whatever portion of these expenses is related to business use – see the Government of Canada website for more details on how to calculate this amount.
Capital expenses. Capital expenses are related to items that benefit your business for several years. Examples of capital expenses include costs incurred by buying or improving property as well as the cost of filing cabinets and office furniture. You can deduct any type of technology your business uses, including new computers, scanners and copiers on top of the usual capital expenses and office supplies.
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. You can only write off expenses related to business – not personal – use of your car, so be sure to keep these expenses separate.
Private health insurance. You can deduct Private Health Service Plan (PHSP) premiums paid to insure yourself or anyone in your household if your business provides 50% or more of your total income. (See the Government of Canada website for details on eligible medical expenses and what the government considers a PHSP.)
Wages for family members employed by your business. You might be able to deduct the salaries you pay family members to work in your business. In fact, splitting business earnings among family members may be a good way to keep income taxes low since you can avoid declaring one large amount as a single income.
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 CRA 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 CRA 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. After all, the CRA wants you to pay your tax bill too – better to develop a repayment plan that works for you than get no repayment at all.
You may also be able to take out a personal loan to pay your tax debt. 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 CRA’s rules.
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 what type of business you have – sole proprietorship, partnership, or corporation – or whether you run a nonprofit. If you’re a sole proprietor, the process is a lot easier as your business taxes are reported on your personal tax forms, thus sparing you the trouble of filing twice.
Sole proprietor or otherwise, you’ll need to keep track of business-specific 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 T1. The standard form for filing your personal income taxes with the CRA.
Form W-8BEN. Residents of Canada who have US employers/clients can complete this form and give it to their employer/client to prevent them from withholding income tax to send to the Internal Revenue Service (IRS) in the States. Without this form, such individuals would be double-taxed – once in America and again in Canada. The form is basically a statement of good faith assuring US authorities that you’ll report your income in Canada.
Business tax forms you might have to file
Form T2. The standard form for reporting corporate income taxes. (Some corporations may be able to complete a shorter version of the form if they meet certain criteria.)
Form T2125. This form is used to report income from self-employment or contract work. Income from sole proprietorships and business partnerships are also reported on this form.
Form T4A. Contractors should receive one of these forms from each client they’ve worked for, and it should state their total earnings from that client. Even if the form is never sent or received too late, contractors are still responsible for calculating and reporting these earnings.
Form T4117. Nonprofits should use this form to report tax-related information.
Business loans can be useful tools for creating cash flow, buying equipment and maintaining supplies. When you take one out, you may also be eligible for business loan tax deductions that can give you a break on your taxes at the end of the year. Looking for more information on business loans? Check out our business loans guide to find out about fees, how to apply, alternative financing options and more.
Frequently asked questions
You can deduct the interest you pay on your loan as a business expense (unless your debt is forgiven). However, you won’t be able to claim the principal amount you borrow as a business loan tax deduction.
Yes, but you can only claim business loan tax deductions for the interest you paid on the portion of your loan you used for business expenses. You won’t be able to claim any personal expenses under business loan tax deductions. This is why it’s important to keep separate accounts for business and personal purchases to make your deduction claims easier.
Unfortunately, no. You won’t be able to claim any fines or penalties you pay for your loan as business loan tax deductions.
Yes. Failing to file your taxes is costlier than failing to pay them. If you’re concerned about your ability to file or pay your taxes, consult a tax professional.
Stacie Hurst is an editor at Finder, specializing in a wide range of topics including stock trading, money transfers, loans, banking products, online shopping and streaming. She has a Bachelor of Arts in Psychology and Writing, and she completed one year of law school in the United States before deciding to pursue a career in the publishing industry. When not working, Stacie can usually be found watching K-dramas or playing games with her friends and family.
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