Are business loan repayments tax deductible? This is a frequently asked question by small businesses owners. The answer is that it depends on the nature of the loan taken out and how it was repaid. Repayment of a loan to another company would not normally be taxed as the amount is paid in one lump sum.
A company taking out a loan would be considered a creditor and treated as such for tax reasons. The tax office will take into account the amount you paid as interest and other charges on your loan. It would also consider the amount you have now paid back, that is, your original loan amount. However, if you have arranged your repayments into a lower rate of interest, this would reduce the amount you would need to pay to the original creditor. So, in theory, your repayment could be completely tax deductible.
Business loan repayments that are made against a property will not be taxable. Even if you sell the property at a cost less than the amount you took out with the loan, you will not have to pay any tax. However, if the property is used commercially, then your repayments are likely to be tax deductible. If you are able to prove that you used the property for business purposes, then this will qualify you for tax deductible repayments.
A second possibility that may have come up is that repayments could be tax deductible when they are made against personal assets. Again, this could apply if the property used as collateral is your own home. It may even apply if the loan repayment is for business purposes. It would be best practice to prove in your returns that these repayments are for a personal asset rather than a commercial one.
Another possibility that may have occurred to you is that the loan repayments could be tax deductible only in certain circumstances. For instance, if your loan repayments are made against a tax-free gift property, such as land or some other asset, then you will not have to pay any tax on them. Also, you will not have to claim any tax on interest or capital gains on the value of the asset. It will be necessary to substantiate these facts with supporting documentary evidence before applying for tax-deductible expenses. However, it may still be worth the expense to ensure that the conditions stated in the question are met.
You should also bear in mind that there are some exceptions to the first two questions posed above. If you use a tax deductible repayment to buy an asset such as a depreciated building or machinery, then it may be necessary to make a claim on your income tax before you can avail of the tax deductible payment. This can happen if you cannot repair the asset within a reasonable time. In such a situation, you would be able to deduct the amount you actually paid as loan repayment but you will have to wait until the asset has appreciably appreciated in value and become . . . . . . taxable.
Of course, the second question often posed to me when I consult with people about how to make business loan repayments tax deductible is “What if I am not able to repay my loan early?” If you can afford to make the repayment without delay, then you may not have to worry about this particular issue. If you do not have adequate savings either to make the repayment early or in cash, then you will need to consider a business line of credit. These provide the flexibility of making smaller repayments that are tax deductible.
As with most matters, there really is no sure thing when it comes to tax deductible expenses. When it comes to loans, you should always take it one step at a time. Do not expect to be able to deduct all of your costs immediately, although you should be making progress on your savings. If you do not have sufficient savings, then you should consider making larger payments and making them tax deductible. The trick is to be realistic about what it is you can realistically afford to spend on repayment every month.