Tax time is always a hectic period for business owners. During this time, you will be trying to identify as many deductibles as possible to minimise your payment obligations on your tax bill. If you’ve taken out or are considering a business loan, you are likely wondering whether or not it is tax-deductible.
Is a business loan tax-deductible in Australia?
Yes and no. The interest paid on each loan repayment is tax-deductible, but you will not be able to make tax claims against the loan principal that you owe the lender.
- You can claim all interest on business loans up to June 30
- You can claim all interest on personal finance used to help maintain your business (which you claim in your personal tax return)
All interest payments related to your business can be claimed as a tax deduction, including interest on superannuation contributions for your employees, new revenue-generating assets (like equipment), and financial products like business loans.
To avoid your tax claims being rejected, you need to keep a record of all the interest payments you have made to your lender. To deduct interest from your loan payments, you need to prove to the ATO (Australian Taxation Office) that you have been paying loan interest.
Is my business loan considered taxable income?
Typically, no. A business loan is not considered taxable income since it is money that you are paying back, not money you generated by selling products or services. There are some minor exceptions to this, but they are not associated with regular business loans acquired through a bank or financial lender. However, any debt you have that is forgiven will become taxable income.
What types of business loans have tax-deductible interest payments?
Virtually all types of business loans allow you to make deductions against interest payments. This includes standard small business loans, business line of credit, and business credit cards. Any interest payment you make for a business-related expense can be claimed on tax.
Is a loan repayment a business expense?
No – a business loan is used to cover business expenses, and obligatory repayments would not constitute an expense. While the principal you borrow and pay back to the lender is not considered an expense, the interest that you pay is. If you require the loan to operate your business, then the total cost of that loan (the interest you pay back to the lender) can be considered an operating cost. This expenditure can be written off on your tax return.
What else can you write off?
Apart from interest payments, there are a variety of other running costs that businesses can claim. This includes:
- Insurance payments
- Employee education
- Employee gifts
- Travel costs
- Employee super contributions
- Repairs and maintenance
The whole list of possible deductions for businesses is exhaustive. If you’re a business owner who wants to pay as little as possible in tax, then having clear records is essential for ensuring you can make as many claims as possible without them being rejected.
When to lodge your tax return
The structure of your business will change how you report business taxes to the ATO.
- As a sole trader, you only need to lodge an individual tax return that represents your personal and business finance. Lodge by October 31.
- In a partnership, you need only report the net business income (revenue minus expenses and deductions). Both partners then file individually and pay taxes on the amount they personally earned. Lodge by October 31.
- For a company, a company tax return needs to be lodged with payment of company taxes. On top of this, you will need to lodge a personal return for the salary that you earned. Due dates vary from company to company, but most fall on February 28. If you have any outstanding returns, the due date is October 31.
- For a trust, you still need to lodge a tax return even though you typically won’t be required to pay any tax. The return will simply state the net income of the trust minus expenses and deductions. Tax is paid by the beneficiaries of the trust on their personal returns.
Keeping track of all of this information can be tough, so many small business owners will hire a tax professional to ensure that their return is accurate and filed on time. Of course, a tax professional will also be adept at identifying tax deductions so that the business pays as little as possible.
What is a business loan?
A business loan is a type of debt finance that you borrow from a bank or financial institution for business purposes. Business loans are just like personal loans in that you pay back a portion of the principal lump sum plus interest payment on a repayment schedule, which is usually monthly.
Interest payments can be fixed or variable depending on the type of loan you get. These loans can also be secured or unsecured, which determines whether or not you are required to provide collateral against the amount you borrow.
A small business loan is a great way for business owners to generate capital in order to set up, such as hiring staff, modifying their storefront, and buying or leasing necessary equipment. When applying for this kind of financing, several things such as your business credit score and the length of time you’ve been operating will be evaluated by the lender.
Do you need a business loan?
Now that you know that you can claim tax deductions on loan interest payments, you might want to consider applying for a business loan yourself. With OnDeck, you can apply for a loan amount ranging from $10,000 to $250,000 on 6-24 months terms. Enjoy an easy application process with low loan origination fees of only 3%.
Frequently Asked Questions
Can I claim a business loan on my taxes?
You can claim the interest from the loan but not the principal amount. You can only claim business expenses when lodging a tax return, and only the interest you pay is considered an expense.
How are business loans treated for tax purposes?
The lump sum you get from a business loan is not considered to be taxable income since you are paying it back to the lender. The interest you pay is considered a business expense and can be claimed as a deduction.
What types of loans are tax-deductible?
No type of loan is entirely tax-deductible; only the interest payments are. This includes regular business loans, lines of credit, and business credit cards.
Can you write off a small business loan?
No, you can’t entirely write off a small business loan – you can only claim the interest payments on your tax return.
Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at June 2021. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.