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Can Business Loans Be Written Off? (And Other Tax Implications of Small Business Loans)

Are your business loans tax deductible? Find the answer to this as well as other tax-related loan questions.

Business taxes can be quite complex. There’s a lot that you have to figure out if you want to ensure you fulfill your tax obligations correctly. 

This is especially true if you decide to take out a loan.

A loan can be an excellent way to cover your business expenses. Sometimes they can even save your business from failing.

A business in the accommodation industry incurred many expenses that it couldn’t meet. Little by little, the business was getting buried in debt. Costs were piling up and the owner couldn’t find a way to get out of it.

To overcome the problems, the owner decided to take out an unsecured loan. The owner’s personal credit wasn’t ideal, so this was the best option.

The owner took out $90,000 over a 12-month period. He put the funds to good use and managed to get his business out of debt.

But what does the ATO think about you taking out a business loan? Let’s answer some popular questions that business owners have with regard to tax implications.

Can Business Loans Be Written Off?

As a business owner, you might struggle to figure out how deductions work when you borrow money. After all, aren’t all business expenses deductible?

According to the ATO:

‘You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.’

However, business loans aren’t always directly related to the business activities that earn income.

Therefore, you can only write off the cost part of your business loans, i.e. the interest. The loan principal, of course, is business liability and not a cost.

As you know, the amount of money that you repay includes interest paid on that loan. And those interest expenses are the portion of the loan that you can write off. 

Keep in mind, though, that this is only true if you use the entire loan for business purposes. Interest accrued on the loan amount that you spend on personal items isn’t deductible.

It’s very important that you keep track of every loan repayment that you make in a fiscal year. You must include proof of interest paid when you submit your tax return. Either that, or you can obtain a statement from your lender. 

Is Your Loan Considered Taxable Income?

Some may not understand how taxable income works when it comes to using external business financing. 

Usually, the loan that you take out doesn’t fall under taxable income. This is because external financing is just money that you’ll pay back to the lender. While there are some exceptions, they don’t apply to loans that you can take out from a bank or an online lender.

However, there is an exception that applies universally, regardless of your lender. If all of your debt gets forgiven, the amount that the lender forgives is taxable income. Even if you didn’t pay any taxes when you first received the funds, this makes it taxable.

Is Loan Repayment a Business Expense?

If you take out a business loan, you’re doing it to cover some of your business expenses. You might have come upon a rare opportunity that you want to take advantage of. Or maybe you run a seasonal business and you need money to get through the slow season.

Whatever the case may be, you’ll be spending the money on something business-related. But is the repayment of that money a business expense?

It’s not for tax purposes. As mentioned, the principal of your loan is a liability, not expenses. 

The interest paid, on the other hand, is an expense. It’s the cost of the loan, just like any other business costs.

What Else Can You Write Off?

Many business owners may not know what business expenses are tax deductible and therefore they overlook business expenses that they can deduct.

Here are some expenses that are tax deductible:

  • Business credit card interest
  • Employee gifts
  • Tax preparation fees
  • Education
  • Healthcare tax credit
  • Professional fees
  • Insurance

There are many more expenses that you can deduct so ensure to include all of them so that you don’t miss out on opportunities to save money on taxes.

Know Your Taxes

Hopefully, you now have a better understanding of how taxes work in relation to business loans. Knowing this is vital to determining if a loan makes sense for your business.

It certainly helps to write off the interest that you pay on your loan, as it’s the biggest loan-related expense that you’ll incur. 

As explained in the beginning of this article, taking out an unsecured loan is a great way to support your business, whether it’s for growth or to get out of temporary hardship.

If you need a loan, visit our website to find out what we have to offer. And if you’re ready to apply, use our online form to lodge your application. This will take less than five minutes.

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