Are Business Loans Tax Deductible? Maximize Benefits

Small business owners can finance large purchases or generate quick cash by taking out business loans. Small business loans offer opportunities for growth and improving cash flow.

Your business must repay the loan funds, and you may wonder: Are business loans tax-deductible?

While loan repayments do not generate tax deductions, your business can write off loan interest expense. Business loan interest payments can reduce taxable income and lower your tax burden.

This article explains how borrowers can generate tax benefits from interest expense. 

We’ll explore the tax-deductible components of business loan payments and explain how the tax laws apply to your business. We’ll also provide tips on which documents your business should retain to support your interest deductions.

Business Loans and Tax Deductions

Types of Loans

Financial institutions offer a wide range of business loans. Consider the following financing options, suitable for a variety of business purposes.

• SBA loan: Business owners can apply for financing through the U.S. Small Business Administration (SBA). Approved borrowers receive loan proceeds from private lenders. SBA loans often have lower interest rates and longer repayment terms. Startups can enjoy favorable financing terms.

• Term loan: Borrowers can obtain long- or short-term loans for numerous business needs. Banks offer varying loan repayment periods and interest rates.

• Business line of credit: Lines of credit allow business owners to obtain short-term financing for small projects, working capital, or immediate cash flow needs.

• Refinancing: Business owners can refinance one or more business loans to obtain lower interest rates or shorter repayment periods.

• Equipment financing: Lenders provide loans specifically for funding equipment purchases. Business owners generally offer the equipment as collateral to secure the loan.

• Commercial real estate or construction loan: Real estate and construction loans support the purchase or construction of real property, such as multi-family residences, office buildings, or retail spaces. Developers use the property as debt collateral. Financing terms and interest rates vary depending on the business purpose.

• Business credit card: Business credit cards offer immediate funds for short-term business expenses. Financial institutions generally impose high interest rates on credit card accounts, promoting faster repayment. 

Small business owners can choose from many additional options for initial funding or when considering a second loan. The experts at 1-800Accountant can help your business understand the tax implications.

Loan Components

If you’ve opened a personal credit card, taken out a student loan, or obtained a home mortgage, you’re probably familiar with debt repayment structures.

Loan components generally include the principal, loan fees, and interest.

For example, consider a $20,000 loan. The principal represents the loan amount of $20,000. The borrower may need to pay upfront loan fees ranging from $100 to $600. Interest accrues unpaid principal and interest. Interest rates vary depending on numerous factors.

Interest can compound daily, monthly, or at longer intervals. Business loan interest often compounds daily.

Business Loan Interest Deductions

Income tax laws generally allow businesses to write off interest expense. Deductible interest expense includes interest incurred for business purposes.

Eligible taxpayers include corporations, partnerships, sole proprietors, and limited liability companies (LLCs). However, limitations apply.

Taxpayers must follow the Internal Revenue Code Section 163(j) rules, which limit interest expense deductions for certain businesses. The Internal Revenue Service (IRS) offers practical guidance on the rules.

Business Interest Expense Limitation

Taxpayers with gross receipts exceeding $30 million must use a formula to calculate deductible business interest expense. Businesses in specific industries, such as real estate or farming, can elect out of the limitation.

For relevant taxpayers, the maximum interest expense deduction represents the total of the following: 

• 30% of adjusted taxable income: Adjusted taxable income represents business earnings before income tax. Taxpayers can no longer include addbacks for depreciation or amortization expense.

• Business interest income: Relevant items include interest earned on business bank accounts, loans to customers or third parties, and business investments.

• Floor plan financing interest expense: Floor plan financing often applies to car dealerships and high-cost equipment retailers.

If interest expense limitations apply to your company, your business can carry forward nondeductible interest expense.

How to Deduct Business Interest Expense

When filing your business income tax return, report the interest expense incurred during the tax year. Each business tax form includes a line for interest expense deductions.

Be sure to maintain appropriate records to support your tax deductions.

We recommend partnering with business tax professionals for help calculating and reporting your interest expense deduction. 1-800Accountant offers small business accounting and tax filing services to support accurate, timely compliance.

Why Loan Principal Repayments Aren’t Tax-Deductible

Your business can write off interest expense, but principal repayments represent nondeductible transactions.

Consider the following reasons:

• Loan proceeds do not represent taxable income, meaning the business does not pay income tax on the cash loan proceeds. Similarly, the principal repayment is not a tax deduction.

• Accounting entries for the monthly payments of principal include a decrease in cash and liabilities. The entry does not include income statement accounts. Unlike interest, principal repayments do not generate an expense.

Other Nondeductible Loan Costs

Upfront loan costs, such as credit reports and collateral appraisal fees, generally represent nondeductible business expenses. Additionally, personal loans cannot generate business tax deductions. Business owners must track personal expenses separately.

Several business loan costs may generate tax deductions throughout the loan repayment period. Your business must generally capitalize the following loan fees and deduct amortization expense over time.

• Loan application and origination fees

• Filing and closing costs

• Broker and legal fees

Tax implications depend on the loan agreement, so we recommend partnering with business tax experts for accurate calculations and reporting.

Keeping Your Loan Records Straight

Business owners should maintain loan records and documentation to support tax deductions. Consider the following loan document checklist for your business. 

• Loan agreements, including repayment schedules, interest rates, and relevant financing terms

• Origination fees, closing costs, and related amortization schedules

• Periodic loan statements, including principal and interest

• Monthly payment confirmations

• SBA loan applications and approvals, if any

In the event of an IRS audit, your business can provide loan records and related documents to prove a debtor-creditor relationship. 1-800Accountant offers audit defense services so you can feel confident in your business tax return documentation.

Making the Most of Small Business Loan Interest Deductions

Business owners can maximize the tax efficiency of their business loans using the following strategies.

• Consider loan timing: Time your financing for optimal interest expense deductions. For example, if your business expects higher taxable income in future years, consider finalizing loan documents late in the current tax year.

• Make elections: Real estate businesses can elect out of Section 163(j) limitations. Specific rules require longer depreciation cycles for electing businesses.

• Maximize deductions: Review origination fees and loan costs to maximize amortization expense deductions.

• Strategize cash sources: Use equipment financing to improve cash flow for large purchases while allowing depreciation and interest expense deductions.

As always, we recommend consulting tax professionals for specialized recommendations. Small business accounting experts can help your business achieve tax efficiencies while optimizing financial health.

Unlocking Tax Efficiency with 1-800Accountant

Business loan tax rules can feel confusing. Even if you’ve handled taxes before, some questions need expert advice.

Some deductions, such as business loan interest, require extra attention. Your business may qualify to deduct certain expenses. However, rules can vary depending on your industry, loan structure, or income level.

For example, you may need to:

• Apply interest deduction limits if your revenue exceeds $30 million.

• Calculate loan fee amortization over several years.

• Separately track personal and business interest expense.

• Choose the right time to finance or refinance.

You don’t have to figure this out alone. 1-800Accountant can help your business consider tax-efficient financing and accurately report your loans.

Our team of experienced CPAs works with small businesses every day. 1-800Accountant helps business owners comply with tax laws while saving on professional fees.

How 1-800Accountant Can Guide Your Journey

From customized tax preparation to real-time accounting support, 1-800Accountant’s services help small businesses maximize every financial move. Our platform combines the convenience of modern tools with the insights of seasoned professionals who know how to translate tax law into practical advice.

1-800Accountant offers tax prep, accounting, and year-round support. 1-800Accountant experts work with businesses yea-round to proactively manage financial decisions and tax strategies.

You’ll have access to licensed CPAs who can answer your questions, catch red flags, and help you avoid surprises. So you can confidently move forward and stay focused on running your business.

Whether you’re just getting started or you’ve been in business for years, 1-800Accountant can help. Schedule a free consultation with 1-800Accountant’s team of experts.