Are Business Loan Payments Tax Deductible? Business Loan Blog - Tata Capital

What are the Tax Benefits of Business Loans?

Mar 06, 2017

Business owners enjoy several benefits when they opt for an institutional loan. The money may be used for various purposes, such as working capital, inventory and equipment. Borrowers also have flexibility in repaying the loan as per cash flow to ensure that there is no stress while servicing the borrowed amount.

The loan repayment affects the monthly and annual expenditure of the business. One lesser-known beneficial aspect of such loans is the tax deduction. Here are some basic tax benefits of a business financial arrangement:

  1. Understanding Interest
    The business loan interest is the additional amount that the borrowers need to pay for borrowing the money. It is a fee paid to the lenders for allowing the usage of the funds.
  2. Knowing Tax Deductible Expenses
    These are necessary and ordinary expenses that are beneficial for businesses to generate income. The deductible expenditures may be subtracted from the revenues before arriving at the tax liability. In other words, these expenses may be reduced from the gross revenue to lower the taxable income. The interest paid on the loan availed for the business is deductible, which helps lower the taxes for the company. Knowing the interest rates, processing fees and other terms and conditions before availing the loan are important.
  3. Is Interest on Business Finance Tax Deductible?
    In one word, yes. The tax authorities allow tax benefits to companies that avail business finance. The interest paid for servicing the borrowed amount is deductible from the gross income. This amount is paid through the business income as a service fee for using the borrowed funds. Promoters are advised to maintain proper accounts of these payments as proof if such need arises in the future.
    However, it is important to note that the principal repayment amount is not tax deductible. The borrowed amount is not an income for the business because it is not earned. Moreover, the loan must be repaid during the tenure. This means the principal repayment is simply paying back the money (which was not an income for the business), which is why this amount is not tax deductible.

A business loan has many benefits and is fairly easy to avail. However, borrowers need to remember that the money has to be repaid at some point. Failure to repay it in a timely manner may have severe consequences. Therefore, owners are advised to know their requirements and assess the situation of their business before making the decision to avail a loan.