Are Business Loans Tax Deductible? 

For small business owners, understanding which expenses can reduce your taxable income is crucial for financial success. If your business has taken out financing, you may be eligible to deduct the interest you pay, potentially saving thousands of dollars each year. 

Disclaimer: This article is for informational purposes only and is not tax advice. Please consult a qualified tax professional regarding your specific situation before making any decisions related to business loan interest deductions.

What Is Considered a Business Loan?

The IRS allows businesses to deduct interest paid or accrued during the tax year on qualifying loans. To claim these deductions, you must meet three key criteria:

1. You are legally liable for the debt
2. Both you and the lender intend for the debt to be repaid
3. You have a true debtor-creditor relationship with the lender

If the business loan funds are applied directly to business activities, you will satisfy all three criteria for deducting interest.

Are Business Loans Taxable Income?

Business loans are not considered taxable income. Since loans represent borrowed funds you’re obligated to repay, the principal amount doesn’t count as income for tax purposes.

However, the interest you pay on business loans may be deductible as a business expense, helping you reduce your taxable income and lower your overall tax burden.

Tip: If a lender forgives or cancels your loan, that forgiven amount could become taxable income. Most debt forgiveness requires you to include the cancelled amount in your income, with limited exceptions like bankruptcy or insolvency.

Interest Deductibility By Type of Financing

Different financing products have different tax implications. See table below for an overview.

Product	Interest Deductibility
Business Term Loan	Yes, generally
Business Line of Credit	Yes, generally
Business Equipment Financing	Yes, generally.
SBA Loans	Yes, generally.
Revenue-Based Financing (RBF)	No, see next section for special consideration*
Merchant Cash Advance (MCA)	No, see next section for special consideration*

Special Consideration: Non-Traditional Financing*

While revenue-based financing are not traditional loans, they may offer tax benefits.

Unlike traditional loans where you deduct interest payments, revenue-based financing works differently from a tax perspective. Since revenue-based financing is a purchase of your future sales receivables rather than a loan, the fees you pay (often called the “factor rate” or “factor fee”) are generally deductible as a business expense, not as interest expense.

Key differences to understand:

Product	Tax Treatment
RBF Advance Received	Not taxable income
Repayment of Advance	Not deductible
RBF Associated Fees	Generally deductible as a business expense

Because revenue-based financing are not loans in the traditional sense, the tax treatment differs from traditional financing. 

Tip: Keep records of your RBF or MCA agreements, all repayments, and associated fees. 

Important Exceptions

Mixed-Use Loans

If you use a loan for both business and personal purposes (like a vehicle used for work and personal errands), you can only deduct interest proportional to the business use percentage. 

Consult with your tax professional so you understand all applicable deductions for your business.

If you want to explore business financing options, call us at 800-230-9822 to learn more.

For more information on business equipment deductions, read our guide on Section 179 Tax Deductions on Equipment Financing.