Small Business Administration (SBA) loans

Top 4 Tax Perks of SBA 7(a) Loans

Updated: July 14th, 2020

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SBA 7(a) loans are one of the hottest small business financing options out there—and for good reason! These government-backed loans give your business access to up to $5 million in working capital, and they also have low-interest rates and lenient repayment terms.

Plus, these handy-dandy small business loans come with a few cool tax perks—more on that in a minute.

Contrary to popular belief, the Small Business Administration (SBA) isn’t doing any of the lending on traditional SBA 7(a) loans. Instead, they partner with SBA-approved lenders to guarantee a portion of the SBA loan (up to 85% of the total loan amount). This guarantee reduces risk to the lender, meaning your business gets more capital at a better rate. Win-win.

If you’re considering getting an SBA 7(a) loan, you might be wondering what tax implications to expect. Lucky for you, there are a few subtle tax perks you can claim with an SBA 7(a) loan—you just need to know where to look.

1. Business Loans Aren’t Considered Taxable Income

Receiving a lump sum of cash in the form of a loan is different than generating revenue. The latter is considered taxable income, while the former is not.

When you receive cash disbursements for your SBA 7(a) loan, you won’t incur any tax obligations. So rest assured that your loan payments (with their associated interest and fees) are what you owe month to month—but nothing more for the state or the IRS.

There are exceptions to this rule, but you likely won’t run into them when you’re getting a traditional business loan like an SBA 7(a) loan.

2. SBA 7(a) Interest Payments Are Tax-Deductible

Tax season is usually about what you owe, so it’s always lovely to find deductions that lower your overall tax burden. As long as you meet the IRS requirements, you’ll be able to deduct 100% of your interest payments on your SBA 7(a) loan:

  • You must be the legally liable person for the loan
  • You must have agreed with the lender to repay the loan
  • The applicant must have a “true debtor-creditor relationship” with their lender
  • When refinancing, you can’t deduct interest paid on funds from a 2nd loan used 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
  • The applicant can’t deduct capitalized interest (see the IRS’s explanation under “Capitalized interest”)
  • You must use the cash to deduct interest payments—money sitting on standby won’t be eligible for deduction

3. SBA 7(a) Loans Typical Structure Means More Upfront Deductions

Most term loans have you paying higher interest at the beginning of your loan repayment and less towards the end. This repayment schedule helps you claim more significant tax deductions to help offset your new debt. 

Once you’ve had time to use your SBA 7(a) loan to grow your business, you’ll be better positioned to claim lower interest tax deductions in the future. Since SBA loans can have up to 25-year repayment schedules, this gives you plenty of time to claim the upfront deductions now and build your business to be better prepared for the bigger tax burdens later.

4. Some States Offer SBA Loan Tax Credits

SBA loans usually require a guaranty fee, but some states offer small businesses a way to recover those costs. Oklahoma, for example, passed a bill that allows small businesses to claim a state tax credit that’s equal to the guaranty fee paid for their SBA guaranteed loan.

Tax credits are a bit different from tax deductions:

  • Tax credits directly reduce the total taxes you owe dollar-for-dollar.
  • Deductions reduce the income that is subject to taxes.

Tax credits are almost always better than tax deductions because they directly lower your tax bill. Check your state’s tax laws to see if they provide similar SBA tax relief to small businesses. It’s a seemingly small gesture, but every penny counts.

Claim Your SBA 7(a) Tax Benefits

Owning and operating a small business costs a big chunk of change, but at least SBA 7(a) loans allow you to reduce your tax obligations. There are always exceptions and fine points when it comes to taxes, so always make sure you consult with a tax professional if you’re unsure about claiming a specific deduction or credit.

If you’re looking for affordable financing, look no further than an SBA 7(a) loan. Our loan specialists can help you score a 10-year loan with amounts ranging from $20k to $5 million. Learn more about our SBA 7(a) loans, or get started with your application now.

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