Are SBA Loans Taxable Income for Your Business?

Small-business owners may benefit from taking out small-business loans, Paycheck Protection Program (PPP) loans, or others to help them build their businesses. If you received a PPP small-business loan or opted for a typical SBA loan, you may be wondering if the loan will impact your taxes. Fortunately, most small-business owners’ taxes won’t be impacted on the federal level.

In fact, borrowing money to support your business could lower your taxes. There are exceptions, though, so to learn more about how your taxes could be impacted this year, keep reading.

A Small Business Administration (SBA) loan is designed to give you the capital you need to get your business up and running or to expand. These loans often have high borrowing limits, competitive interest rates, and longer repayment terms than other kinds of loans, which makes them appealing to small-business owners.

Small-business loans are not counted toward your business’s taxable income. Put simply, your taxable income won’t increase, so your tax liability won’t, either.

In fact, there are cases in which you could write off a portion of the interest paid for that loan, helping you deduct more off your income and save yourself money on your taxes.

When combined with write-offs for purchases that benefit your business, you may be able to greatly reduce your annual taxable income, saving your business money despite having extra capital available on hand.

The exception to not being taxed on an SBA loan is if you’ve taken out an SBA loan and asked for it to be forgiven. When a loan is forgiven, the value of that forgiveness may be taxed as income at the federal level.

However, even then, there are certain kinds of loans that won’t be taxed despite having their balance forgiven.

A PPP loan or Economic Injury Disaster Loan (EIDL) will usually not be taxed upon approval for forgiveness. If you have taken out a PPP loan and gone on to seek PPP loan forgiveness, the Coronavirus Aid, Relief, and Security (CARES) Act exempts them from federal taxation.

Your small business may be taxed on all forgiven PPP loans at the state level, however. What happens with your case will depend on which state you live in and how it has decided to handle PPP loans forgiven due to COVID-19.

Most types of small-business loans, like forgiven PPP loans and SBA loan options, are not considered to be taxable income. As you pay off your loan, you can usually deduct the interest that you’ve paid as well as some of the expenses you’ve covered.

There are exceptions that you need to keep in mind when working on your small business’s taxes, so it’s a smart choice to talk to a tax professional about how to make the most of your small-business loan and reduce your tax liability.

Would you like to learn more about small-business loans, loan forgiveness, or small-business taxes? Check out “How Do Business Loans Work?” and other informative articles on Business.org.

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