Business owners acquire business loans to meet and fulfil business-related financial obligations. The applicant can use the funds received by the owner as the loan amount for expanding their business, purchasing raw materials, regulating cash flow, paying rent or employees’ salaries, etc. This article will cover the tax benefits on business loans and numerous aspects related to them.
Tax Benefits on Business Loan
Business loans are tax deductible. The interest a business owner pays for their business is tax deductible. In most cases, it is generally subtracted from their gross income.
According to the Income Tax Act 1961, business owners can avail of the tax deduction on a business loans’ interest amount that is paid from the profits made by the business.
It is stated in the Income Tax Act that the funds utilized in the form of business loans are not considered as the business’s income or the revenue or profit it has earned.
Business loans have numerous tax benefits, which is why most business owners prefer them over other financing methods. The majority of business owners prefer acquiring a loan from a reputed online platform since it offers a hassle-free application and documentation process. Moreover, they take less time than offline sources to approve and disburse the loan amount.
One of the most popular online platforms which offer all types of business loans is Yubi Loans. The renowned financial platform offers numerous varieties of business loans. It is trusted by over 3000 borrowers and has disbursed over 100000+ crores of funds to date. Moreover, the platform features 750+ lenders, each of which offers the best terms and benefits to borrowers. Hence, any individual who wishes to avail of tax benefits on business loans can choose Yubi Loans as their lender to have a seamless and beneficial borrowing experience.
What are the Tax Benefits of Availing a Business Loan?
Interest charge on business loan – All business loans include an interest charge that the borrower must pay back to the lender as part of the monthly installment. This interest component is fully eligible for a tax deduction since it is deemed an expense in the business income statement.
The deduction lowers or minimises the overall business tax liability. The amount repaid to the lending organisation is tax deductible.
MSMEs or Micro, Small, and Medium Enterprises can avail of business loans as the perfect solution for expanding their business and minimising their tax liability. However, the principal amount of the business loan availed from the lending organisation is not tax deductible.
Business expenses – Any business loan availed of by individuals can be used to meet and fulfill daily operational costs to ensure that the business operations function smoothly.
Some of the popular business expenses that can be covered include the wages of employees, office rent, advertising budget, bonuses, etc. The aforementioned expenses are deducted from the revenue earned by the business to determine the net taxable income.
Interest paid on Business Loan is Tax-Deductible
The loan amount repaid to the lender by the borrower as interest is tax deductible. Moreover, it can also be written off or stated as payments made for expanding the business.
The expenditures used to earn income from businesses are deemed business expenses, and thus, they can be subtracted from the overall revenue to acquire the taxable amount. It is an excellent tool for business owners and start-up founders to minimise their business’ tax liability and utilise the funds for expanding their business.
However, the principal amount availed from the lending organisation is not tax deductible, and thus, it cannot be deducted as the business expenses’ part. The amount acquired by the borrower in the form of a business loan is referred to as the principal amount, and borrowers need not pay tax on the principal amount.
The principal amount is an integral part of the gross income, and the tax paid is on the net or overall income earned by the business owner.
Principal Amount on Business Loan is not Tax-Deductible
As mentioned earlier, the principal amount refers to the funding or loan received by a business owner from a bank or an NBFC to fund business-related expenses. Since it is not the interest charged on a business loan or business expense, it is not tax deductible.
Borrowers are not required to pay income tax for the borrowed principal amount. Moreover, it cannot be removed from the business’s gross income. The tax incurred is mostly paid on the net amount earned by the business in a financial year.
Features of Tax Benefits of Business Loan
Here are some of the most prominent features of tax benefits on business loans:
- The interest amount on the business loan is tax exempted, i.e., individuals do not need to pay tax on any business loan’s interest amount.
- As opposed to tax exemption on the business loan’s interest amount, the principal amount is not tax deductible. Hence, borrowers cannot avail of any tax benefits in terms of the loan’s principal amount.
- The interest paid on most business loans is usually subtracted from the business’s gross income.
- Personal loans acquired for business-related purposes are also tax deductible.
- The tax liability is determined by removing the business expenses from the total business revenue earned by the organisation.
- Any individual who wishes to get hold of the deduction on the interest amount needs to fulfil certain criteria, which are set by the lender.
- A business loan borrowed by a lending organisation is deemed funding and not the borrower’s income, and thus, it is not tax deductible.
- Repayment of the borrowed amount in the form of equated monthly instalments or EMIs is not tax deductible.
Types of Business Loans
Tax Benefits Loans and Non Tax Benefits Loans
|Loans With Tax Benefits
|Loans With No Tax Benefits
|Working Capital Loans
|Home Renovation Loans
|Letter of Credit
|Merchant Cash Advance
|Higher Education Loans
|User Car Loans
|Small Business Finance
|Small Personal Loans
Important Points for Business Loans
Any business owner who has or wishes to avail of a business should keep the following important points in mind:
- The monthly interest amount paid by the borrower to the lender is tax deductible. Hence, it must be shown or stated as a part of the business’s expenditure.
- The principal amount or borrowed amount is deemed a part of the business’s gross income, and thus, it will not be taken into consideration when the taxable income gets calculated.
- Any business loan availed of by an individual will not be deemed as part of the income. Hence, it should not be shown as part of the taxable income.
- Any type of business loan, be it a term loan, a working capital loan, a small business loan, an equipment finance loan, etc., is considered to be tax deductible.
- Personal loans acquired by individuals for fulfilling business-related financial obligations are tax deductible.
Will I get a tax deduction if I intend to buy another business?
Purchasing another business can be seen in two ways – either as an investment or a means to support the current business. If the new business is bought to actively fund the previous business, then the interest amount on the loan would be tax deductible.
However, if the purpose behind buying the new business is not to fund the prior business venture, the interest amount charged will not be tax deductible.
Is business refinance considered tax-deductible?
There is always a possibility that a business-owning individual may get a lower interest rate or a more profitable repayment term. In such a case, opting for the refinance option would be the best.
Refinancing can facilitate individuals in saving money in the long term. However, if the money of the second loan is utilized to reply to the initial lender, it will not be deemed a business expense, and thus, the interest amount paid for the first loan would not be tax deductible. However, the interest paid on the second loan will be tax deductible.
Is the interest paid on equipment loan tax-deductible?
Yes. The interest paid on a loan acquired to purchase new machinery is tax deductible.
Will I get tax benefits for interest paid on a business loan?
Yes. The interest amount paid on a business loan is eligible for deduction of taxes, as per the Income Tax Act of 1961.
Can I claim tax deductions if I plan to invest in another business?
If an individual has invested in a new business and plans to run it actively, they can claim the loan’s interest amount for a tax deduction. In contrast, if the individual purchases a new business merely as an investment, the interest amount of the loan is deemed eligible for tax deduction.
When can I claim the tax benefit on interest paid on a business loan?
Individuals can claim the tax benefit on the interest amount paid on a business loan in the financial year in which it falls due as part of the business expenditure.