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SBA 7(a) Loans and Your Taxes—Everything You Need to Know

Small Business Administration (SBA) loans

SBA 7(a) Loans and Your Taxes—Everything You Need to Know

Updated: May 22nd, 2020

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Running a small business is tough, especially when working capital is low and expenses are high. Whether you’re suffering from lost revenue or any other crisis, there’s a solution to get you back on your feet: an SBA 7(a) loan.

An SBA (7a) loan is the Small Business Administration’s (SBA) most popular loan, and it’s not hard to see why. These government-backed term loans provide you with a large cash sum with low interest rates, manageable payment terms, and flexible spending. The only significant downside to an SBA 7(a) loan is the intensive paperwork and processing—but since we can help streamline that for you, this loan really is a win-win.

If you’re planning on getting a loan, you might be wondering how that influx of capital will affect your tax commitments. When it comes to IRS obligations, there are a few subtle nuances to your SBA loans. Below, we’ll cover all the nitty-gritty tax details around the question: “are business loans tax deductible?” Doing so will help you pay exactly what you owe and collect what you’re due, too.

SBA 7(a) business loans and tax deductions

First, the good news is that most loans won’t substantially impact the taxes you owe. Receiving a lump sum of cash in the form of a loan is different than earning revenue for your business. So, you won’t be taxed for the principal amount.

Your interest payments, however, are a tad different. With term loans, your interest payments are tax-deductible. This means you can write off your interest payments as business expenses and lower your overall tax burden.

Fortunately for you, SBA 7(a) loans are term loans (the only difference is they’re guaranteed by the SBA).This means you can deduct your interest payments. Most term loans are structured so that you pay higher interest at the beginning of the repayment schedule and lower towards the end. This means you can claim larger business loan interest tax deductions when you start your loan payments, and this helps offset your new debt.

Are business loans tax deductible: Qualifications and disqualifications

To answer the question of “are business loan payments tax deductible?” you first  need to meet a few IRS qualifications:

  • You are the legally liable person for the loan
  • You’ve made an agreement with the lender to repay the loan
  • You and your lender have a “true debtor-creditor relationship”

You’ll also need to make sure you don’t use your funds inappropriately:

  • You can’t deduct interest paid using funds from a 2nd loan (refinancing) to pay off your 1st loan
  • You can’t deduct interest payments if you assumed debt or property from an original owner—these will be depreciated
  • You can’t deduct capitalized interest (see the IRS’s explanation under “Capitalized interest”)
  • You can’t deduct interest payments made on fees intended to be used on a standby basis

Other than that, your SBA 7(a) business loan interest should be eligible for a tax deduction .

Tax deductions make borrowing less intimidating

Taking on small business debt always has some inherent risk. But, business loan tax deductions make borrowing a little less scary. Plus, it’s a huge benefit that you can deduct more at the beginning of your repayment schedule to help ease yourself into the new debt. 

If you’re looking for an affordable solution to your working capital needs, consider getting an SBA 7(a) loan. Our loan specialists can help answer any additional questions around “are business loans tax deductible?” Plus, you  can score a 10-year loan with amounts ranging from $20k to $5 million. Learn more about our SBA 7(a) loans, or go ahead and start your application now.

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