The world of business loans and tax can often be quite stressful, especially if you are new to this environment.
Suddenly, there are lots of different things that you have to pay for, and lots of different financial decisions that you need to make. This means that when you first take out a business loan, you might not fully understand the implications of this.
One thing that a lot of people do not fully understand in relation to business loans is whether, or not, they count as income. Stemming from this, a lot of people then wonder if this means that their business loan is taxable income.
In this guide, we’ll be answering these questions, as well as giving you information in relation to whether, or not, loan payments are tax-deductible. So to find out more, keep on reading.
Does A Business Loan Count As Income?
Technically speaking, a business loan is a form of income. It is an ingoing payment, not an outgoing payment, and it is money that is now accessible to your business. But, it is not income in the same way that money paid to you from your customers is.
This is because income made during a business transaction is taxable, but a loan given to you from a bank/lender is not taxable. Due to this, a business loan is usually not considered to be income.
But this isn’t the only reason why a business loan does not count as income. The other reason behind this is the fact that a loan isn’t really yours. A bank/lender gives you that money with the agreement that you will be paying it back through monthly repayments.
So, you are simply borrowing that money for the time being, it is not yours to keep.
This is why business loans are not seen as income, and this is also the reason you are not taxed upon them. Loans are not earned, they are given, and this is why they are not considered to be income. Despite them being an ingoing payment to your business account.
Is a Business Loan Considered Taxable Income?
As we have said, no, a business loan is not considered to be taxable income. When a business loan is delivered to your business account, you will not be taxed upon it. This is because you only pay taxes on money earned.
While some people see business loans as a form of income, you are not working to achieve them. So, the government will not tax you on the amount of money that comes into your business bank account when you receive your loan.
However, just because your business loan is not taxable income, this does not mean that it is unaffected by taxes.
There is one exception to loans not being considered taxable income, and this when you negotiate with a bank/lender to reduce your debt. When debt is forgiven, then you will be expected to pay taxes on the amount.
A lot of people worry about the amount of taxes that they will have to pay as a business, but in a lot of ways having a business is an advantage. This is because of the tax deduction that is offered for businesses. So, let’s take a look if business loan payments are tax-deductible.
Are Business Loan Payments Tax Deductible?
Sadly, business loan payments are not tax-deductible. This is because you do not pay any taxes when you receive the loan, as the loan is not taxable income. So, when you repay that loan, you cannot deduct loan principal payments.
This is because you are repaying the money that you borrowed, not the money that you spent. For a lot of people, this can be a grave disappointment, but there isn’t really any need to fret.
Even though you cannot get tax deductions on your loan repayments, there are lots of other aspects of your business where you will be able to get deductions on the taxes that you pay.
For example, interest that has been paid on your business loan is usually tax-deductible. So, you will not get a deduction on the overall cost of your loan repayment.
But, you will be able to have the interest portion of this payment deducted. This is because interest is technically a business expense, and business expenses are tax-deductible. But let’s take a deeper look at this.
How To Make Deductions To Loan Repayments
If you are looking to reduce the amount of money that you spend each month on loan repayments, then this is possible. But, getting tax deductions on your loan repayments isn’t the easiest task.
This is because there are some things that you will need to prove in order to achieve this, they are:
- Proof of repayment to deduct from your loan.
- Proof that you are legally liable for the loan.
- Proof of true debtor-creditor relationship with the lender.
- Proof that the loan funds have been spent on things for your business.
But it isn’t just business loans that can be tax-deductible when funds are spent on the business. It is also possible to deduct taxes on personal loans when the funds have been spent on business purposes.
So, if you use a personal or business loan on equipment, real estate, or any other purchases to help your business, then this money will be tax-deductible. Overall, this will reduce the cost of your loan repayments.
But in order to have tax deductions accepted, you will have to keep detailed records of the purchases/expenses that you want to deduct.
In short, no a business loan does not count as income, and because of this it is not taxable. But, there is one exception to this rule, and that is if you have arranged with your bank/lender to reduce your debt. However, most of the time, a business loan will not be considered to be taxable income.