Tax Benefits on Business Loans – Key Advantages Explained

Every business owner understands the need of a business loan and how indispensable it is. There are multiple reasons why a business loan is required, and that depends upon the need and type of business.  It can be used for the expansion and growth of the business, revamping old machinery, installing and upgrading the plant, hiring new employees, marketing, and promotions of the business, managing cash flow, restructuring the debt, purchasing the raw material, and purchasing the inventory. Some business owners are skeptical about business loans as it requires proper planning and management of funds. Without adequate planning, it can become cumbersome to handle finances and lead to further financial mismanagement.

Availing a business loan comes with a lot of loan tax benefits as the business owner can use the funds for various purposes and get a tax benefit on the interest paid to the lender. In whatever way the funds are being used, a borrower can enjoy tax benefits and lower his/her tax liability. The amount paid back to the lender for the business loan availed is known as the interest amount. There are many business loan tax benefits provided to the borrower by the tax authorities of India which are discussed below:

Interest Paid on Business Loans are Tax-Deductible

The amount paid back to the lender in the form of interest is tax-deductible and can be written off as the payments made for the business expenditure. The expenses used to generate income from business are known as business expenses and can be deducted from the total revenue to get the taxable amount. In-short, a borrower can deduct the interest amount from the business expenditure to arrive at the taxable amount. It is a great tool for small business owners and entrepreneurs to lower the tax liability and use the funds for expanding the business.

The principal amount availed from the lender is, however, not tax-deductible and cannot be deducted as a part of the business expenditure. The total amount availed in the form of a business loan is known as the principal amount, and there is no requirement to pay tax on the principal amount. It constitutes the part of gross income, and the tax is paid on the net income earned by the business owner.

Tax-deductible Business Expenses

A business requires certain expenses for operation and maintenance, and those expenses can be marked as business expenses that are used for generating income. Such expenses can be subtracted from the overall business revenue to reach out to the taxable income.

The below table shows the types of business expenses that are not constituted in the business revenue.

Type of Business Expenses

Wages paid to the staff and employees

The rental cost of the office premises

Cost of leasing out a location

Office supplies like stationery, daily maintenance costs

Expenses incurred on Insurance of the business and premises

Advertising and marketing expenses

Gifts, meals and entertainment expenses

Bonus paid to the employees.

Important Points for Business Loans

Though tax benefit on business loan India comes with major plus points, there are Some of the important points that a business owner should know if he/she has availed a business loan are:

1. The interest paid by the borrower every month on the principal amount is tax-deductible and should be shown as a part of the business expenditure.
2. The principal amount is a part of the gross income and won’t be considered while calculating the taxable income.
3. The business loan availed by the borrower is not a part of the income and hence should not be a part of taxable income.
4. Any business loan, whether term loan, working capital loan, microloan, small business loan, equipment finance, letter of credit, bill discounting, loan tax benefits, and interest paid on the principal amount, is considered tax-deductible.
5. The personal loan available for a business is also tax-deductible.

If the payment is in the form of EMI, which constitutes the part of the principal amount as well as the interest, then please note that only the interest amount will be tax-deductible, not the whole EMI. One can reach out to the financier to understand the interest component in the equated monthly installments.

Types of business loans and how interest Rate Varies

A business firm often requires a high-value investment. The requirements could range from working capital to buying land and manufacturing. Along with the same, one would also need to pay for salaries and other essential operational expenses. A business loan can help to ease your concerns in this situation. You can cover all of your business expenses with the aid of a business loan.

There are various business loan options accessible in India, so it’s important to choose the one that best suits your needs. We have listed ten business finance options for you to pick from below.

• Term Loan
• Loan Against Property
• Equipment Financing
• Startup loan
• Working Capital Loan
•  Invoice Financing
• Business Loan for Women
• Business Overdraft
• Business Credit Card
• Cash Advance for Merchants

Interest rates in business loans vary because of many factors. Several variables, including the lender, the type of loan, the borrower’s creditworthiness, the loan amount, and the loan period, annual turnover, affect the interest rate for business loans. Interest rates for business loans typically start at 20% or more.

Additionally, Bank interest rates are often lower than those of online lenders. However, banks have strict lending requirements and focus on low-risk consumers.

Interest you cannot deduct on Business Loans

The cost of interest on a business loan used to fund operations or cover expenses is known as a business interest expense. However, you can reduce your tax obligation by deducting the cost of business loan interest because of business loan tax benefits, as this deduction lowers your tax liability. You may ask whether the interest paid is always deductible from taxes. The answer is No. Using the business interest deduction on your tax return is subject to IRS regulations.

Nevertheless, there are several circumstances in which you cannot deduct interest. Avoid attempting to claim the interest on loans utilised for personal needs in the following situations.

• Your monthly loan interest payments for your personal vehicle
• Mortgage points (for sellers), service fees, costs related with credit checks, and interest on tax-exempt income
• You can write off the part of interest paid for business expenses if your loan covers both personal and business costs.
• If you pay interest on loans that you aren’t using (for example, if the money is sitting in your business bank account), you cannot claim the interest deduction.
• You cannot deduct interest from your taxes if you refinance a loan and pay the old loan’s interest with the new loan.

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Loan Tax Benefit on Business Loan FAQs:

1. What is a business loan interest?

The interest accrued on the loan amount availed by the business owner to enhance the business activities is known as business loan interest.

2. When the business loan interest not tax-deductible?

There are certain situations in which the interest on business loans is not deductible, and one should always discuss it with the financier to understand the complete terms and conditions.

3. Is the principal amount of my business loan considered as an income?

No, the principal amount doesn’t form the income part of the business.

4. Will I get a tax deduction if I intend to buy another business?

Buying a business can be either an investment or a way to support the current business. If the business being bought is used to run the business actively, then the interest on the loan amount will be tax-deductible. If the purpose is not to run the business, then the interest amount will not be tax-deductible. There are multiple restrictions around the investment as well, and it is preferable to discuss with the accountant and the financier before procuring the loan.

5. Is business refinance considered tax-deductible?

There are chances that a business owner might get a lower rate of interest or a better repayment term, then choosing the refinance option would be better. Refinancing can help save money in the long term, but please note that if the money of the second loan is used to payback the first lender, it won’t be considered a business expense, and the interest paid for the first loan will not be tax-deductible. However, the interest paid back on the second loan will be tax-deductible, and benefits can be availed on that by the borrower.

6. Is the interest paid on equipment loan tax-deductible?

Yes, interest paid on loan availed to buy the machinery is tax-deductible and can be shown as a business expense to reduce the tax liability.

7. What kind of business loans are tax deductible?

Any type of business loan, including term loans, working capital loans, small business loans, microloans, equipment financing, bill discounting, letters of credit, and tax advantages, is regarded as deductible, including interest on the principal amount. Additionally, the personal loan that is offered to businesses is also tax deductible.