Business Loan Finance: What to Do When You File Taxes

Using a business loan finance option for your business provides valuable tax benefits for you and your business. Business loans are generally not considered business income, except in the case where a loan is refinanced and a portion of the debt is forgiven by the lender. The amount of the loan that is forgiven is considered income and is reportable on the business tax return.

Business Loans as Deductible Expense

Business loans are treated as an expense, allowing the business to deduct the principal and interest on the loan during the loan period.  This tax benefit helps a business reduce their taxable income. Just for your information as it important to understand how deductions and credits work for both businesses and individuals, deductions are considered above-the-line reduction in income while a credit is a below-the-line enhancement for a refund or reduction of a taxable amount.

Prepare a Tax Return

When taxes are due by a business, either quarterly or annually depending on the business type and the amount of income earned, the business prepares as part of the tax filing information about the amount of loan interest and principal paid in a given tax year. The Internal Revenue Service or IRS permits a deduction of a portion of the interest and principal paid in accordance with a schedule that is applicable to the business. Although it would be difficult to have an in-depth discussion of the impact of each business type and the way in which a deduction of a business loan can take place, we can simply say that the process is usually handled by a tax accountant or professional that is versed in the IRS code and understands how to properly apply this deduction.

Reporting the Business Loan

The borrower of a business loan will receive a 1099-INT from the lender detailing the amount of interest paid during the year. This information is passed on to the business’s accountants or tax preparer for inclusion with the associated business tax form. This is the same process whether talking about a sole proprietor, a limited partnership, a limited liability corporation or other corporate entity.

Aside from providing information for tax reporting, the business does not have many other requirements for the disposition of business loan finance. As long as the proper forms are received and filed in a timely manner in accordance with the requirements of the IRS a business should be expected to take their legitimate deduction of the loan as a business expense. If problems arise regarding the reporting these should be addressed immediately between the business and the preparer in order to avoid an audit or adverse action by the IRS.