While getting a business loan can mean receiving a sudden, large influx of cash, this money is not considered income, since you’ll be paying it back. As a result, you don’t need to pay income taxes on a business loan. In fact, borrowing money to back-up your business can actually lower your tax liability, since you can typically deduct the interest you pay as a business expense.
There are some exceptions to these rules, however, so read on to learn more about how financing can impact your taxes, along with other important things to keep in mind when filing your business tax return this year.
Do Business Loans Count as Income? The Short Answer
No, business loans do not usually count as income, since this is money that you will be paying back. So while getting a small business loan of, let’s say $100,000, puts money in your business bank account, you’ll be returning that money — along with interest — over time, so it’s not actually considered income.
Do Business Loans Count as Income? The Long Answer
In general, a business loan is not considered income. Unlike revenue generated from sales or services, a loan is a form of borrowed money that needs to be repaid. It provides your business with the needed capital to invest in operations, inventory, equipment, or other business needs. But it does not increase your company’s revenue or profit. In fact, a business loan is considered a liability on your business’s balance sheet.
Because a business loan is not an inflow of funds from regular business operations, it is not considered taxable income.
There is one notable exception, however. If you negotiate with a creditor or lender to reduce your debt, any amount of debt that is forgiven is considered income and you will owe taxes on the amount. 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.
Also keep in mind that alternative financing options, such as crowdfunding, grants, or equity investments, may not be considered loans and could have different tax implications. These sources of funding may have their own specific rules, so it’s important to understand how they may impact your business’s tax situation.
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How Small Business Loans Affect Taxes
While you don’t typically pay income tax on a loan, getting a small business loan can still have an impact on your taxes. Here’s how.
Interest Repayment
The way a small business loan works is that when you are paying it back, your loan payments are typically split between paying interest and paying down the loan principal.
The part of your payment that goes principal is not tax deductible. But the part you pay toward interest typically is tax deductible, which means it can reduce your taxable income and allow you to pay less in taxes than you otherwise would.
In order to take advantage of this tax deduction, however, you must have a true debtor-creditor relationship with the lenders (money you borrow from friends and family doesn’t count, even if you are paying them interest).
In addition, the money you borrowed must be used for assets and expenditures necessary to operate your business. If you spend the money in other ways or the loan proceeds are sitting in your business bank account, the interest will not be a deductible business expense.
Common Business Expenses You Can Write Off
In addition to interest on business loans, other expenses that are ordinary and necessary to keep your business running are also likely to be deductible. Here’s a look at some common small business write-offs you won’t want to miss.
• Home office: If you are working from home in an area that’s only used for your business, you can usually deduct home-related expenses for that space — rent or mortgage payments, utilities, and more.
• Commercial rent: If you rent office space, these money payments will most likely be deductible.
Utilities: Expenses like phone, electricity, and internet for your business typically qualify as business expenses.
• Employee salaries: Whether you pay full-time, part-time, or contract help, employee salaries are generally deductible as a business expense.
• Marketing: Money you invest in advertising, content marketing, and social media management is generally considered a deductible business expense.
Office supplies and equipment: This includes computers, printers, paper clips, paper, pens, and anything you need to conduct your business.
• Professional dues: Membership fees or dues you pay to trade boards, business leagues, civic or public service organizations, bar associations, etc., can usually be written off as a business expense as long as the membership is required for (or helps you perform) your business duties.
• Software: Your business can typically write off software programs you bought or subscribe to, such as Microsoft Office or Adobe Creative Suite.
• Mileage: If your business involves traveling by car, you can likely write off some of those expenses, including mileage, tolls, and parking, though you’ll need to keep careful track during the year.
• Entertaining clients: Taking a client out for a meal at a restaurant (that isn’t lavish) where work is discussed is 50% deductible in 2024.
The key to claiming business deductions is to keep detailed records of all your expenses, being careful to always separate business and personal expenses.
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Common Business Expenses You Can’t Write Off
There are certain business expenses that, while they may seem ordinary and necessary, are not deductible. Here are some to keep in mind when filing your business taxes.
• Expensive gifts to clients: Gifts given to your clients or customers are only deductible up to $25 a person.
• Entertaining clients: Taking clients out to the theater or for a day of golfing is not deductible.
• Commuting expenses: Driving your personal car to and from work every day or taking public transportation is not deductible.
• Contributions to political parties or candidates: You may feel strongly about and support a local political candidate. That person may plan to invest in your industry. Even so, contributions to that candidate’s campaign are not tax deductible business expenses.
• Membership fees to social clubs: Even if the members may be clients or potential clients, membership fees to social or country clubs are not typically deductible.
Here’s a quick comparison of expenses that you can and can not write off.
| Qualified Business Expenses | Unqualified Business Expenses |
|---|---|
| Dues to professional organizations | Dues to social clubs |
| Taking a client to a restaurant | Entertaining clients |
| Travel to client sites | Travel to and from your office |
| Client gifts that cost $25 or less | Client gifts over $25 |
Personal Tax Returns vs Business Tax Returns
If you started a business this year, you may wonder how filing your business taxes differs from filing your personal taxes. Here’s a look at how the two compare.
Similarities
If you operate your business as a sole proprietor, little will look different in how you file taxes. You’ll file your business income along with all your other income as personal income on IRS Form 1040.
The same goes for businesses with pass-through structures (meaning business income is passed-through to the owner), which include general partnerships, limited liability companies (LLCs), and S corporations.
The tax rate is also the same: For tax year 2024, it ranges from 10% to 37% percent. (You may also need to pay an additional 15.3% self-employment tax on income from your business.)
Your tax return may also be due at the same time. The tax-filing date for self-employed people, independent contractors, and gig workers is the same as it is for individuals – around April 15.
Recommended: What Happens If I Miss the Tax Filing Deadline?
Differences
When you own a business, there may be additional tax forms you need to fill out besides Form 1040. Which ones depend on how your business is structured. C corporation owners file Form 1120, while S corporation owners must submit Form 1120S. Partnerships file an informational return known as Form 1065.
If you have an LLC and want to be treated as a corporation or partnership for tax purposes, you will use Form 1120 or Form 1065 for your business taxes.
Depending on your business structure, tax rates for your business income may differ from personal income. If you have formally established a corporate entity, there is a flat federal tax rate of 21% on business income no matter how much your business earns.
Tax return due dates may also differ. If your business is structured as a corporation. partnership, or multi-member LLC, you’ll need to file around March 15 (unless the business operates on a fiscal year).
Also keep in mind that when you are operating a business, you will likely need to make estimated tax payments every quarter (on January 15, April 15, June 15, and September 15). Some businesses must also file monthly payroll taxes.
Here a snapshot of personal tax returns vs. business tax returns.
| Similarities | Differences |
|---|---|
| Individuals, sole proprietorships, and pass-through businesses all file Form 1040 to report income. | Some business structures require other forms, such as Form 1120, Form 1120S, and Form 2065. |
| Sole proprietorships, partnerships, and other pass-through businesses pay the same tax rate on business income as personal income. | Businesses organized as corporations pay the corporate tax rate. |
| The tax-filing date for self-employed people is the same as it is for individuals – around April 15. | Partnerships (including multi-member LLCs) and S corps filing deadlines are typically March 15. |
The Takeaway
Most business loans are not considered taxable income. However, when paying one off, you can likely deduct any interest you pay from your taxable income, thus lowering your overall tax liability.
There are always exceptions when it comes to taxes, so it can be a good idea to consult a tax professional if you’re unsure about whether any type of funding you’ve received could be counted as income and the validity of any business deduction.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Is loan repayment considered a business expense?
Payments on the principle of a business loan are not considered a business expense and are, therefore, not tax deductible. However, the interest you pay on a business loan typically is considered a deductible business expense.
Can you deduct interest you paid on a business loan?
Yes, the interest you pay on a business loan is typically tax deductible.
Is an SBA loan considered income?
Just like the proceeds of any business loan, the money you receive through a Small Business Administration (SBA) loan is not viewed as taxable income, since you will be paying that money back. The interest you pay on an SBA loan (or any type of small business loan), however, can usually be deducted as a business expense.
Photo credit: iStock/Drazen Zigic
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