Are SBA Loans Taxable Income for Your Business?

Good news for small-business owners: most of the time, SBA loans can actually help lower your taxes.

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Small-business owners may benefit from taking out small-business loans, Paycheck Protection Program (PPP) loans, or others to help them build their businesses. If you received a PPP small-business loan or opted for a typical SBA loan, you may be wondering if the loan will impact your taxes. Fortunately, most small-business owners’ taxes won’t be impacted on the federal level.

In fact, borrowing money to support your business could lower your taxes. There are exceptions, though, so to learn more about how your taxes could be impacted this year, keep reading.

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A Small Business Administration (SBA) loan is designed to give you the capital you need to get your business up and running or to expand. These loans often have high borrowing limits, competitive interest rates, and longer repayment terms than other kinds of loans, which makes them appealing to small-business owners.

Is your SBA loan taxable?

Small-business loans are not counted toward your business’s taxable income. Put simply, your taxable income won’t increase, so your tax liability won’t, either.

In fact, there are cases in which you could write off a portion of the interest paid for that loan, helping you deduct more off your income and save yourself money on your taxes.

When combined with write-offs for purchases that benefit your business, you may be able to greatly reduce your annual taxable income, saving your business money despite having extra capital available on hand.

Exceptions to the rule: forgiven loans

The exception to not being taxed on an SBA loan is if you’ve taken out an SBA loan and asked for it to be forgiven. When a loan is forgiven, the value of that forgiveness may be taxed as income at the federal level.

However, even then, there are certain kinds of loans that won’t be taxed despite having their balance forgiven.

A PPP loan or Economic Injury Disaster Loan (EIDL) will usually not be taxed upon approval for forgiveness. If you have taken out a PPP loan and gone on to seek PPP loan forgiveness, the Coronavirus Aid, Relief, and Security (CARES) Act exempts them from federal taxation.

Your small business may be taxed on all forgiven PPP loans at the state level, however. What happens with your case will depend on which state you live in and how it has decided to handle PPP loans forgiven due to COVID-19.

How do SBA loans affect your taxes?

So, since your SBA loan is unlikely to count as income, how does it affect your taxes? The good news is that SBA loans generally impact your taxes positively.

Your loan can help you reduce your tax liability in two main ways.

  1. The SBA loan may have interest that you can deduct a portion of on your tax return.
  2. The SBA loan may have helped you purchase common items used in business that you can write off on your taxes, such as marketing materials or professional dues.

You can write off a portion of interest in most cases, and you may also write off at least a portion of the expenses paid when you use loan proceeds to purchase items for your business. Either of these opportunities to write off what you spent can be used to lower your tax liability.

Remember that you cannot write off the monthly payments you make toward the loan’s repayment. Business loan payments are not tax-deductible expenses, just as the loan itself is not taxable income.

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The takeaway

Most types of small-business loans, like forgiven PPP loans and SBA loan options, are not considered to be taxable income. As you pay off your loan, you can usually deduct the interest that you’ve paid as well as some of the expenses you’ve covered.

There are exceptions that you need to keep in mind when working on your small business’s taxes, so it’s a smart choice to talk to a tax professional about how to make the most of your small-business loan and reduce your tax liability.

Would you like to learn more about small-business loans, loan forgiveness, or small-business taxes? Check out “How Do Business Loans Work?” and other informative articles on Business.org.

Related reading

Don’t qualify for a business loan? Get a personal loan instead.

Are SBA loans taxable income for your business? FAQ

Do you have to claim an SBA loan on your taxes?

You do not have to claim an SBA loan on your taxes as taxable income. This kind of loan is not to be reported as taxable income on a federal tax return. State requirements may vary, so it’s important to look into your specific state laws. Remember, too, that though the loan isn’t reported as taxable income, it may still be reported in other ways, such as by reporting the principal balance to the IRS and reporting the interest for the purpose of taking a deduction.

Are business loans considered taxable income?

Usually, when a business loan is accepted by a company, it isn’t included as taxable income. However, while you can’t deduct loan principal payments as the loan is repaid, you may still be able to take deductions on your tax return for expenses and interest paid.

How do I report an SBA loan on my taxes?

You don’t need to report an SBA loan as income on your tax return. However, you can deduct any interest you pay on the loan amount from your taxes.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Catrina Cowart
Written by
Catrina Cowart
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