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If you’re taking out a business loan, it’s important to know how it might affect your tax and the deductions that could be available to you. This article answers these questions and more.
Can business loan payments be deducted from taxes?
Business loan repayments comprise interest, which accumulates across the duration of the loan, and the repayment of the loan amount (known as capital), itself.
While repayments of loan capital aren’t tax-deductible, it may be possible to deduct the interest generated over time from your tax bill. This is because interest is normally considered a business expense.
If your loan is used entirely for business purposes, you should be able to claim interest repayments as a tax deduction.
If you use your loan to cover both personal and business expenses, you can only claim a deduction to your tax bill on the business expenses.
Are loan arrangement fees tax-deductible?
If you pay an arrangement fee on a business loan upfront, you won’t be able to deduct the cost from your tax bill. However, if an arrangement fee is charged as part of your interest repayments, it may be tax-deductible. Legal fees associated with business loans may be deductible too.
Other forms of finance
Interest paid on other forms of finance – including business credit cards and overdrafts – might also be eligible for tax deductions.
Is a business loan considered taxable income?
A business loan is not usually considered taxable income, as this is money that you have borrowed, rather than earned through your business.
One exception may be if the loan is written off, or forgiven, in certain circumstances.
Are director’s loan repayments tax-deductible?
A director’s loan involves either borrowing money from your limited business in your role as director, or loaning your business money from your own personal finances.
Generally, director’s loan repayments and the interest paid if borrowing funds from a business are not deductible for a director. However, loans to directors have very specific tax rules and charges depending on the amount borrowed and when a loan is repaid. A tax professional can help make sure everything is correct.
However, if a company borrows from a director, and interest is charged on the loan, the interest payable may count as a business expense, and therefore could be tax-deductible for the business.
Proving tax-deductibility to HMRC
You must be able to prove to HMRC that expenses are “wholly and exclusively” related to your business to qualify as tax-deductible. For business loans, this means keeping detailed spending records to inform your tax assessment, including loan agreements and details of interest payments.
Also keep receipts to specifically show how your business has spent the proceeds of a loan. This is particularly important if it’s possible a loan may have been used for personal reasons too.
Rules around tax-deductibility for businesses and business loans can be complex, so you may want to seek advice from an accountant or other tax professional.
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