Are Business Loans Tax Deductible?

Taxes are one of the biggest expenses you’ll encounter when running a business. Assuming your business is profitable, you’ll have to pay taxes. The good news is that you can often claim write-offs to minimize your business’s tax liabilities. If you buy a product or service that is considered essential to your business’s money-making activities, you can typically claim it as a write-off. As a result, you might be wondering whether business loans are tax deductible.

Are Business Loans Tax Deductible?

Loans Themselves Aren’t Tax Deductible

Business loans themselves generally aren’t tax deductible. If you obtain a $500,000 loan with which to finance your business, you won’t be able to claim it as a write-off. The Internet Revenue Service (IRS) doesn’t allow business owners or entrepreneurs to write-off loans.

Why can’t you claim a business loan as a write-off? Well, because it’s a loan, you won’t incur the cost of the full cost of the loan. If you purchased a product or service for $500,000 that your business needs to perform its operations, you can claim it as a write-off. With a loan, on the other hand, you won’t pay the lender the full cost of the loan. You’ll essentially borrow money from the lender.

Interest Fees on Loans Are Tax Deductible

While business loans themselves aren’t tax deductible, this doesn’t apply to interest fees. The IRS allows for the deduction of interest fees on business loans.

Interest, of course, is how lenders make money on loans. It’s a percentage-based fee that’s paid periodically over time. It can range anywhere from 3% to 70% — sometimes even more, depending on what lender and loan type of you choose. Regardless, any money that you pay in interest on a business loan can be claimed as a write-off.

The Bottom Line on Business Loans and Taxes

Principle payments aren’t tax deductible. A principle payment is simply a repayment. Using the same example from above, if you obtained a $500,000 business loan, you’ll be responsible for paying $500,000 in principle payments. That money is simply being transferred back to the lender, so the IRS doesn’t view it as tax deductible.

Fortunately, you can claim interest fees as a tax write-off. Interest fees aren’t repayments. You don’t borrow the interest that you pay to a lender. Therefore, you can claim it as a write-off. Just remember to keep track of all your interest payments so that you can take advantage of this write-off when you prepare and file your taxes.

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