A Detailed Guide on Tax Benefits on Business Loans

A Detailed Guide on Tax Benefits on Business Loans

Business owners often look for business loans to fulfil their requirement of short-term as well as long-term needs. The disbursed loan amount can be used for business expansion, procurement of materials, purchase, installation of machinery, renovation of the premises, shifting to a new office, etc. A business loan can be secured or unsecured.

The business loans are beneficial for owners as they are tax-deductible. The interest amount payable on a business loan is deductible from the gross income. This means that the principal loan amount does not offer any tax benefits. If you have taken a personal loan for business purposes, the interest amount is still eligible for tax-deduction. Tax deduction on interest payment for a business loan helps business owners reduce the liability of taxation.

The tax liability is calculated by subtracting the total business expenses from the total business revenue. To avail of tax deductions, borrowers need to fulfil the criteria set by the lender. There are innumerable benefits of taking a business loan.

Benefits of availing a Business Loan

1. Business expansion- To run a business smoothly, you need funds. The requirement of funds can arise at any time. Business expenses are incurred to generate income for the business.

2. No Collateral required- If your business is in operation for 3 or more years and your annual revenue is up to the mark, then several lenders offer you business loans without requiring any kind of collateral.

3. Tax benefits- A businessman pays the interest accrued on the loan amount. When the loan is used for business purposes, the interest paid is eligible for a tax deduction. You can use the loan amount to buy equipment, pay salaries, pay for advertising and marketing expenses, etc.

Who requires a Business Loan?

Small and medium enterprises, traders, retailers, private limited companies, public limited companies, start-ups, sole proprietorships, etc., are eligible for a business loan. Business owners generally apply for a business loan to manage their working capital and liquidity so that their daily operations aren’t stressed.

The loan provides a dual advantage as the amount can be utilized for business purposes and the interest amount lowers the taxable amount. Hence, businessmen prefer to avail of a business loan to enjoy tax benefits. Before applying for a business loan, businessmen should ensure that the eligibility criteria such as good credit score, healthy financial records, tax returns, the existence of a business of more than 2 years, etc., are met.

Interest Paid on Business Loans as a Tax Deduction

The amount paid as interest on a business loan to the lender is treated as a tax-deductible item. The payment of interest is written off as business expenditure allowed for a tax deduction. A business generates income by incurring business expenses that are deducting from the total revenue generated through sales.

Interest payment on a loan is a useful tool for small and medium enterprises & entrepreneurs. The tax deduction lowers the liability of tax payment that can be used for expanding business. The sanctioned amount of a business loan is the principal amount that is not tax-deductible. The principal amount is not treated as a part of business expenditure. Hence, tax is not paid on the principal amount. The principal amount is a part of gross income and the tax is payable on the net income earned by the owner of the business.

Types of Business Expenses being Tax-

To generate income, business expenses are incurred to run a business smoothly. Such business expenses are used for running business operations, repairs, and maintenance. The business expenses are subtracted from the total revenue earned to achieve the total taxable income.

The business expenses include wages and salaries paid to the staff and employees, rent of the premises, payment of insurance premiums, cost of leasing, advertising and marketing expenses, gift, meals and entertainment expenses, lighting expenses, power and fuel,

telephone charges, bonus paid to the employees, office supplies, stationery, and other office expenses.

Is a Personal Loan for Business Purposes eligible for Tax Benefits?

If you have taken a personal loan to meet your business needs, the question is whether interest payment on a personal loan is eligible for a tax deduction. The loan amount sanctioned can be used for boosting working capital, payment of salaries, account payables, etc. Yes, a personal loan for business purposes is eligible for a tax deduction. The taxation rules stand the same.

The tax deduction is allowed only for the interest amount of a personal loan. The principal amount is not a tax-deductible expense. The overall interest payment is deducted from the gross profit that lowers the taxable income of the business. There is no ceiling set on the interest amount to be claimed as a deduction. The condition is that the loan amount should be used only for business purposes.

Therefore, businessmen need to submit proof of the amount incurred for business operations. As there is no upper limit, businessmen should store all the bills and receipts to show how the loan amount has been incurred for business expansion and growth. It is advisable to maintain bills and receipts to avoid any discrepancies with the IT department.