Small business finance experts often recommend Small Business Administration (SBA) loans above all other types of funding. That’s because the SBA loan program’s government backing ensures that participating banks receive money even if borrowers default. That, in turn, means SBA lenders may offer funding with highly favorable interest rates, repayment periods, and monthly payment amounts. You may be able to borrow hundreds of thousands of dollars with SBA loans – but what if that gets added to your taxable income?
The good news is that the answer to the question “are SBA loans taxable income?” is a resounding “no.” If anything, SBA loans may benefit your business come tax time. Read on to learn more about how.
The interest you pay on your SBA loan may be partially or fully tax-deductible. If so, your SBA loans will typically affect your business taxes positively – by lowering them.
Additionally, some purchases you make with your SBA loan proceeds may be tax-deductible. These may be purchases you couldn’t have afforded without your loan. They include things like equipment, machinery, advertising dues, office supplies, and professional membership dues.
You can generally deduct your interest payments on your small business loan if:
You generally cannot deduct your interest payments if:
SBA loans themselves are not taxable as income. This means that your loan amount typically has no impact on your taxes.
One exception exists: If your loan is forgiven, the forgiven amount is added to your business income and taxed accordingly. However, forgiveness amounts on SBA Economic Injury Disaster Loans (EIDL) for COVID-19 relief, as well as Paycheck Protection Program (PPP) loans , are typically not taxed on a federal level. That said, some states may still tax your forgiveness amount as business income and bar you from deducting expenses paid for via EIDL loans.
In most cases, you may deduct your interest payments on all types of SBA loans. Here are five types of SBA loans that business owners commonly use.
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