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Tax implications of business loans
Learn everything you need to know about business loans and tax.
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If you’re considering taking out a loan for your business, it’s important that you understand how it may affect your tax reporting. Find out if you’ll need to pay tax or even get tax benefits when getting a business loan.
Is a business loan considered taxable income?
No, business loans are not generally considered business income as it is money that you have borrowed and are paying back as opposed to money that the company has earned.
The one major exception is if some or all of your debt is forgiven by the lender or creditor. The amount that is forgiven would then be considered income for tax purposes.
Are business loans tax deductible?
While a business loan itself is not tax deductible, you should be able to claim any interest you pay on the loan as a tax deduction, provided the loan is used for business purposes. If the loan is used to cover business and personal expenses, you would only be able to claim the interest on the amount of the loan that was used by business expenses.
Can I get a business loan to pay my VAT or tax bill?
Yes, some lenders offer business finance to help cover your tax bill if your business does not have the capital available. However, if your business finds itself unable to pay its regular tax bills, going into debt may not be advisable.
You could consider invoice financing, or even a business line of credit, to cover your tax payments if your business has irregular cash flow.
Director’s loans
Just like a normal business loan, if you lend money to your own business through a director’s loan, the company does not have to pay tax on the loan. Any interest you charge would be considered a business expense and therefore could be claimed as a tax deduction for your company.
However, you will need to declare any interest you receive on the loan as personal income, which means you will have to report it when you complete your tax return.
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