Each year at tax time business owners seek clarity around which expenses they can leverage to optimise their tax commitments. In this guide we explain what is considered a business loan expense and if you can claim it at tax time.
Understanding business loan expenses
What is a business loan?
A business loan functions in the same way as ordinary loans: It is a financial agreement between a business and a lender. A specified amount of money is provided as the loan and the business then repays the money in installments, over a set period and – most commonly – with interest.
There are diverse types of business loans and varied reasons why a business may want or need one. Businesses that are just starting out or seeking to expand are common recipients of loans. This allows them to either access more working capital, purchase new equipment, invest in new inventory or expand in other ways.
The terms and conditions of the business loan are set by the institution providing the loan, such as a bank, online lender or credit union.
What is a business loan expense?
One of the most frequent questions when it comes to tax and business loans is whether loan repayments are a business expense. The short answer is no.
The long answer is that a business loan expense is considered to be any cost that a business incurs as part of the process or experience of borrowing money from a financial institution and/or lender.
Examples include the interest paid, the processing fees, origination fees or any other additional expenses incurred when one is obtaining or repaying the loan. When it comes to taxable income, these expenses are considered deductible.
Your regular repayments to the lender or financial institution are not considered taxable income. The reason for this is that you’re simply paying back the amount of the lump sum you borrowed over time. In that respect, it may be an expense to your business, but it is not considered a business expense for tax purposes.
What does it mean for something to be claimed from tax?
If you are not sure what it means for something to be claimed at tax time or “from tax”, it refers to determining 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 you owe the Australian Taxation Office. If you have paid that portion of tax already, you may be eligible for a tax credit and be refunded.
Claiming is normally done through the correct tax forms and requires documentation as evidence of the expense. When done correctly, it can lower the amount of one’s income that is taxed and save you and your business money.
Business loan expenses to claim at tax time
So, can you claim business loans as expenses when it comes to tax? The answer to this question is yes and no.
Some ‘costs’ of a business loan can indeed be claimed as tax deductible, whereas other expenses, such as the loan repayments themselves, are not considered claimable.
Tax disclaimer
The laws and regulations governing taxation in Australia can be quite complex and confusing. Not to mention the fact that they are subject to change. For up to date and accurate information and guidance on all things tax and business loan expenses, seek advice from either your accountant/tax professional or the ATO itself.
None of the following is to be considered as financial advice.
Claiming business loans as tax expenses
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 your business loan.
Fees
Fees are often charged by the lender at various points of a business loan transaction. While establishment fees are the most common and are charged at the initial setting up of the loan, there might be other costs associated with the application or any legal consultation thereafter.
These fees are all considered claimable as tax deductions.
We recommend seeking custom taxation advice regarding any other fees incurred, such as penalties or late fees, before claiming them as deductible.
Interest
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 your loan agreement.
Interest paid on loans is generally considered to be tax deductible. Note, however, that if the financial loan is partly used for private purposes, this can change the associated tax implications.
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Source: ScotPac