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 (a.k.a. The borrower or lendee) then repays the money in installments, over a set period of time and–most commonly–with interest.
There are different types of business loans and different 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 common 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 that are incurred when one is either 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’re 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’ve paid for 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 substantially 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.
1. 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 penalty or late fees, before claiming them as deductible.
2. Interest
Interest on a loan, whether it’s 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.
ScotPac – your business loan questions can be answered here!
If you’re looking for more bespoke and tailored answers to your business loan expense related questions, reach out to the nearest ScotPac office to you. We have offices across Australia, so there’s bound to be a member of our team ready and available to help.
As the largest non-bank lender in Australia, we know a thing or two about business loans. In fact, we advocate for small businesses–especially those in need of borrowed capital–by partnering and lobbying with ASBFEO, providing insightful commentary on key themes and issues facing small-to-medium sized enterprises.
Plus, with abundant case studies and stellar Google reviews from our past clients attesting to our commitment to finding the right working capital solutions for them, you can rest assured that the ScotPac team will be more than capable in adding the fuel you need to help your business grow!