Tax Implications of Business Loans: What Is Deductible?

Business loans have important tax implications. Understanding what is deductible and how to properly report loan-related transactions can save you money and prevent IRS issues.

This guide covers the key tax considerations for business borrowers.

Loan Proceeds Are Not Income

The most fundamental tax rule: borrowed money is not taxable income.

• Loan principal: Not reported as income when received
• Why: You owe it back; it is not a gain
• Caution: If loan is forgiven, forgiven amount may be taxable
• Reporting: Loan receipt does not appear on income statement

Interest Is Generally Deductible

Interest paid on business loans is typically tax deductible:

• Ordinary and necessary: Interest must be for business purposes
• Timing: Deduct in the year paid (cash basis) or accrued (accrual basis)
• Limitations: Interest deduction caps may apply for large businesses
• Documentation: Keep records of all interest payments

Loan Fees and Costs

Treatment of various loan costs:

• Origination fees: Generally amortized over loan term
• Legal and closing costs: Amortized over loan term
• Appraisal fees: Deductible as business expense
• Guarantee fees (SBA): Amortized over loan term
• Points paid: Amortized over loan term (not immediate deduction)

Principal Payments Are Not Deductible

Principal repayment is not a tax deduction:

• Principal payments: Not deductible; returning borrowed money
• Common mistake: Trying to deduct entire loan payment
• Correct approach: Only interest portion is deductible
• Tracking: Separate interest from principal in records

Equipment and Asset Purchases

How borrowed funds used for assets are treated:

• Depreciation: Equipment purchased with loan proceeds is depreciated
• Section 179: May allow immediate expensing of equipment
• Bonus depreciation: Additional first-year depreciation may apply
• Interest plus depreciation: Get deductions from both

Loan Forgiveness Tax Implications

If any loan amount is forgiven:

• Generally taxable: Forgiven debt is typically treated as income
• PPP exception: PPP loan forgiveness was specifically excluded from income
• Insolvency exclusion: May exclude if insolvent at time of forgiveness
• Report carefully: Forgiven amounts must be properly reported

Personal Guarantee Considerations

Tax implications of personal guarantees:

• No immediate tax impact: Signing guarantee has no tax consequence
• If you pay under guarantee: May be able to claim bad debt deduction
• Capital loss treatment: Payment under guarantee may create capital loss
• Documentation critical: Keep records of guarantee payments

Refinancing Tax Considerations

When you refinance a loan:

• Remaining unamortized costs: Can deduct balance of old loan costs
• New loan costs: Begin amortizing over new loan term
• Cash-out refinancing: Additional funds are not income, but use matters
• Prepayment penalties: May be deductible as interest

Record Keeping Requirements

Maintain these records for tax purposes:

• [ ] Loan agreements and promissory notes
• [ ] Amortization schedules showing interest/principal split
• [ ] Closing statements showing all fees paid
• [ ] Annual 1098 forms from lender (if issued)
• [ ] Bank statements showing payments
• [ ] Documentation of how loan proceeds were used

Entity Type Considerations

Tax treatment varies by business structure: