Your business is on the verge of expanding and probably you are looking for finances to back it up. But, how does this funding affect the already complicated taxes? A business loan is generally not considered as taxable income as it is the money you are paying back. There could be few exceptions; such as if the debt is forgiven then the amount forgiven becomes taxable income. Thus, what counts as taxable income and which part of the business loan expense is tax deductible? Find out more by reading the article below.
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Is the Interest Paid on Business Loan Tax Deductible?
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Yes, you can typically deduct the business loan interest paid. If a specific amount is not used for business expense, then in such cases the interest paid on this amount will not be tax deductible.
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Is Loan Repayment a Business Expense?
Loan repayment could be considered as a business expense, partially. The complete repayment is not accounted as business expense as the principal amount is not a cost to the business, but the money you received and then paid back. The interest is considered deductible as it is not the part of the amount borrowed originally.
Is Tax Based on Personal Income Different Than That on Business?
If you are a salaried individual then what you pay as tax is decided on the income you draw as salary. As per the personal income drawn per year, you will be eligible to pay a certain percentage of tax depending on the tax slab you fall in. When it comes to business income, it is different than personal income. The taxes on business will purely base on the revenue generated from the business alone and your personal income (if any) will not be considered. But you are liable to pay taxes separately on personal income and business income.
Which Business Expenses Are Tax Deductible?
You can consult a business loan tax specialist to understand if your business can qualify for one of the given deductions:
- Software: The Company can write off software programs subscribed or bought, from the taxes to be paid.
- Home Office: In case you work from home or a room and use it for business purpose, then usually you should be able to deduct home related expenses for that space (utility payments, rent, or mortgage payments etc.).
- Health Insurance: In case you are self-employed, you should be able to deduct what you pay towards premiums up to the business’s net profit for that particular year. In certain scenarios, your children’s and spouse’s health insurance premiums could be deductible as well.
- Mileage: If you require travelling for business purpose, then in some incidences, you can write off these expenses from tax. The expenses can include charges for parking, toll, mileage etc.
- Wages for Employees: You could be eligible to deduct the salaries paid to teenagers under 18 as an expense for business. Deduction can also be available on employee salaries for individuals over 18 years of age.
- Office Supplies and Equipments: If the equipment does not mean only heavy machinery, then you can deduct expense for any kind of technology your business utilizes, including new scanners, computers, copiers, or usual office supplies.
There are few overlooked business expenses such as those related to education, healthcare tax credit, business credit card interest, non-penalty bank service charges, retirement tax credit, professional fees, tax preparation fees, employee gifts, start-up costs etc.
What If I Want a Tax Extension?
If you are unable to pay what you owe as taxes on business before the due date, then you can look for tax extension options. This will require your previous files on tax paperwork. Depending on the type of business, you will have to fill different forms to file for a tax extension.
If you are not sure about the estimated tax, then use a tax payment worksheet. You can also look at the previous year’s taxes to get an approximate idea. If you overpay than actual tax amount, then on filing for refund, you will receive the additional amount.
What has to be done if I Have Business Tax Debt?
There could be several changes taking place over a year, especially if your business is new. You may even come to understand that you do not need all the funds that have been borrowed. If you owe money to the Tax Department and cannot immediately repay, then you have to take necessary steps to minimize the financial impact on your business.
- You can contact the Tax Department directly and set up an appropriate payment plan that eliminates or reduces possible penalties owing to non-payment or delay of payment.
- It is possible to take out a tax debt loan. These loans can reduce the likelihood of you becoming personally liable for the debts originating on the business, and help in avoiding associated penalties.
- In few cases, the financial institution can provide a specialist to navigate the Tax Department.
Business loans are useful tools to generate cash flow for business expansion, maintaining supplies, purchasing equipments etc. When you are paying off the loan, you can likely deduct the interest amount from the taxes you pay. There are of course always exceptions when it comes to payment of taxes and what should be deductible. You may want to consult a tax professional if you are not sure about the validity of a deduction.
Satchit hasabnis is a highly qualified Chartered Financial Analyst who has more than 10 years of experience in the industry. He has been associated with global giants like DCB, HSBC, and Caparo Financial Solutions. He has co-founded, Loanbaba, which provides quick and easy loans like Personal loans, Business Loans, Gold Loans etc to people of different economic background.