Know the tax implications of a business loan

Last week’s post talked about debt-based crowdfunding and the tax implications. 

Some of them were much more favorable than their donation or equity-based counterparts. But not every tax situation is sunshine and roses when borrowing money. 

So, today’s post will cover the good, the bad, and the ugly of taxes as they apply to any business loan. 

Let’s go! 

The good tax implications of a loan

Taking out a loan can be much more preferable than offering equity in your business.

First, you don’t (theoretically) lose any control over your business. There may be caveats associated with a loan, but rarely does the loaning entity try to take over daily operations. 

But beyond retaining control, loans can be tax-friendly, unlike donations or equity, which carry a tax burden. 

Loans don’t count as taxable income, and the interest paid is generally tax deductible.  This reduces taxable income, which can help lower overall tax liability. 

If the loan is used to purchase assets like equipment or property, you may be able to depreciate them. So, over time, you continue to reduce taxable income. 

You may even be able to employ the Section 179 tax deduction or bonus depreciation. 

Section 179 allows you to deduct the full cost of the qualifying assets in the year they were purchased. 

Bonus depreciation is being phased out, but you can still deduct 40% of an eligible asset’s cost in 2025.

The bad 

As mentioned earlier, loans don’t count as taxable income. 

However, there are some instances when they can. 

For example, if you default on a government relief loan, it may be considered taxable income. And yes, that income all hits in the same year the forgiveness was granted. 

There are caveats if you claim bankruptcy when asking for relief, but it can still be a bitter pill to swallow. 

That brings us to the next part of business loans and taxes. 

The ugly 

If you do have a business loan forgiven, reporting can be a headache. In fact, it’s almost essential that you consult with a tax professional to ensure adequate compliance. 

That introduces an additional expense into an already difficult situation. 

Still, the last thing you need after defaulting on a loan is an audit letter from the IRS. 

So, it’s probably always wise to employ a CPA to report any loan to ensure compliance. 

If you don’t, at least be sure to report the loan as a liability on your balance sheet and accurately record interest payments as expenses on the income statement. 

The Bottom Line

Business loans can provide the leverage needed to help your business survive a difficult time or accelerate timelines.  And they can even be tax-friendly under most circumstances. 

Still, there are pitfalls, so be sure to use your CPA as a strategic partner before taking out a loan. That way, you gain insight into strategies that ensure the loan serves your business and doesn’t become its master.