Are your business loans tax deductible?
Discover the benefits of a business loan and how you can deduct the interest from your taxes. Presented by Chase for Business.
Quick insights
- Interest paid on most business loans is generally tax deductible as a business expense, while principal payments are not.
- Different types of business financing (including SBA loans, lines of credit and equipment financing) have specific tax treatments.
- Consider consulting a qualified tax professional to help with accurate filing and to identify deductions that may be available.
Running a business requires capital, and for many entrepreneurs, taking out a business loan can be a helpful step to fuel growth, manage cash flow or purchase essential equipment. Identifying and claiming available tax deductions can be an important strategy for maintaining the financial health of a business. However, the tax code treats different parts of your loan payments differently.
Here are some things you may want to know about business loans, tax deductions and how to prepare for tax season.
Are business loans tax deductible?
When determining if your business loan payments are tax deductible, you generally need to split your monthly payment into two categories: the principal and the interest.
Generally, the interest portion of your business loan payment is tax deductible as it is typically considered an ordinary and necessary business expenseOpens overlay by the IRS. However, the principal repayment, or the original amount you borrowed, is not deductible.
This is because when the bank deposited the loan into your account, the IRS did not count that money as taxable income. Since you didn't pay taxes on the money when you received it, you generally cannot claim a tax deduction when you return it.
Note that larger businesses may be subject to limitations on the deductibility of business interest. For example, for 2026, a business would be subject to these limitations if the business’s annual gross receipts for the three taxable years ending with 2026 exceed $32 million.
What kinds of business loans are tax deductible?
If the loan is used for a legitimate business purpose, the interest on most types of commercial financing may be deductible. This includes:
- Traditional term loans: Whether you are taking out a lump sum to open a second storefront or buy a commercial oven, the interest on fixed repayment schedules is typically deductible.
- SBA loans: Loans backed by the Small Business Administration (SBA) follow the same general rules. Interest is often deductible.
- Business lines of credit: If you draw from a line of credit to cover seasonal payroll or unexpected inventory costs, the interest accrued on the drawn amount may be deductible.
- Equipment financing and commercial real estate financing: Interest on loans used to purchase company vehicles, heavy machinery or office space generally qualifies.
Are business loan fees and closing costs tax deductible?
In general, loan origination fees, SBA guarantee fees and closing costs are tax deductible. However, you may not be able to deduct them all in the year you pay them.
Often, the IRS requires you to amortize (spread out) these deductions over the life of the loan. A Certified Public Accountant (CPA) may be able to help you determine the correct schedule for deducting these fees.
When are business loans not tax deductible?
There are specific scenarios where your loan interest may not qualify for a tax deduction. Here are some possible examples:
- Personal use: If you take out a business loan but use a portion of the funds to pay personal expenses, the interest on that portion generally won't be deductible.
- Commingled funds: If you use a personal loan or personal credit card to buy business supplies, the interest can be deductible. However, you generally need to be able to clearly prove to the IRS that the funds were used exclusively for the business. If you use a single loan for both personal and business reasons, you typically can only deduct the interest prorated to the business use.
- Forgiven loans: If a business loan is canceled or forgiven, you no longer owe the debt, meaning there is no further interest to accrue or deduct moving forward. Furthermore, the forgiven amount is generally treated as taxable income, though certain exceptions may apply (for example, in certain cases of insolvency or bankruptcy).
- Refinancing with the same lender: If you are a cash basis taxpayer and you borrow money from your original lender to pay the interest on your original loan, you generally cannot deduct that interest until you actually pay it off with new funds.
Information needed for tax deductions
Preparation can be helpful for a smooth tax season. To help capture eligible deductions and potentially avoid raising red flags, consider gathering the following documentation for your accountant:
- Year-end statements (or Form 1098 for mortgage interest or business real estate): Your lender should provide a year-end statement detailing exactly how much interest you paid during the tax year.
- Amortization schedules: This document breaks down each payment you make, showing how much goes toward the loan principal and how much goes toward interest.
- Proof of use: It can be helpful to keep receipts, invoices and bank statements that help prove the loan funds were spent on legitimate business expenses.
- Bank records: One way to prove business use is to have the loan deposited directly into a dedicated business checking account rather than a personal account.
As always, it’s best to consult with a tax professional to ensure you have the proper documentation when filing your taxes and are implementing the correct tax strategies and deductions.
Frequently asked questions
Are business loan principal payments tax deductible?
No. Principal payments are simply the return of the borrowed funds. Because the loan wasn't taxed as income when you received it, the repayment is generally not a deductible expense.
Are SBA loans tax deductible?
Yes, the interest paid on SBA loans often qualifies for tax deductions, provided the loan funds were used for valid business purposes.
What happens if I use a personal loan for my business?
If you use a personal loan strictly for business expenses, the interest is generally deductible. However, you may need to maintain meticulous records to help prove the funds were not used for personal reasons.
Should I consult a tax professional about business loans?
It is recommended to consult a professional for tax advice, as tax laws are complex and subject to change. A qualified CPA or tax advisor can help you navigate the nuances of your specific debt structure, help you identify and claim available deductions and help keep your business compliant.
