A business loan is a type of financial agreement between a business and a lender, where a specified amount of money is provided as a loan, and the business is responsible for repaying the money in installments over a set period, with interest. Different types of business loans are available, depending on the lender and the specific needs of the business. Businesses that are just starting out or seeking to expand are common recipients of loans, as this can help them access more working capital, purchase new equipment, invest in new inventory or expand in other ways.
When it comes to tax and business loans, one of the most common questions is whether loan repayments are considered a business expense. The short answer is no. A business loan expense is any cost that a business incurs as part of the process or experience of borrowing money from a financial institution or lender. Examples of business loan expenses include interest paid, processing fees, origination fees, or any other additional expenses that are incurred when obtaining or repaying the loan. These expenses are considered tax deductible, meaning that they can be claimed against taxable income.
However, regular repayments to the lender or financial institution are not considered taxable income. The reason for this is that the business is simply paying back the amount of the lump sum borrowed over time. While it may be an expense to the business, it is not considered a business expense for tax purposes.
To claim an expense from tax means to determine that a particular cost or expense is tax deductible. If it is tax deductible, then its value is taken away from the amount of tax the business owes the Australian Taxation Office (ATO). If the business has already paid for that portion of tax, it may be eligible for a tax credit and be refunded. Claiming expenses is typically done through the correct tax forms and requires documentation as evidence of the expense. When done correctly, it can substantially lower the amount of the business’s income that is taxed and save the business money.
In Australia, there are currently two different business loan expenses that can be claimed and considered tax deductible. The first category covers any fees associated with the obtaining, processing, or ongoing management of the loan. The second category is the interest charges associated with the business loan. Fees charged by the lender at various points of the business loan transaction, such as establishment fees, application fees, or legal consultation fees, are all considered tax deductible. However, it is important to seek custom taxation advice regarding any other fees incurred, such as penalty or late fees, before claiming them as deductible.
Interest on a loan, whether it is a business loan or other form of loan, is the amount above the principal amount borrowed that needs to be paid back to the lender. The interest rate is determined according to the particulars of the loan agreement. Interest paid on loans is generally considered to be tax deductible. However, if the business loan is partly used for private purposes, this can change the associated tax implications.
It is important to note that the laws and regulations governing taxation in Australia can be complex and confusing, and they are subject to change. For up-to-date and accurate information and guidance on all things tax and business loan expenses, businesses should seek advice from either their accountant/tax professional or the ATO itself. None of the information provided here should be considered as financial advice.
To find out how Woodward Finance can assist you and your business to achieve your business goals, please contact Kim at:
0439 313 541
kim@woodwardfinance.com.au
