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Updated: July 14th, 2020
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.
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.
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:
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.
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 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.
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.
Jesse Sumrak is a Content Marketer at Twilio SendGrid focused on writing killer content. He's created and managed content for startups, growth-stage companies, small businesses and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. Jesse studied Public Relations at Brigham Young University.