Is a business loan taxable income

One of the most difficult parts of starting or running a business is knowing all of the laws and rules you have to follow to keep it in good standing with the government, IRS, etc. One of the most difficult and daunting tasks for any business is understanding and interpreting business tax law.But, do not get too discouraged, even many tax professionals do not completely understand tax law, so as long as you do what you can, and seek some help when you get stuck, chances are you will be alright. However, let's discuss the frequent question of "Is a business loan taxable income?"

This is a legitimate question, and one that you certainly want to know, as if it is you need to pay your taxes on it so you don't get penalized and your business does not get seized, etc. But if it isn't, you will need to know so you do not pay taxes that are unneeded.

So, to determine if a business loan is taxable income let's first take a look at a basic definition of what "business income" is. Basically, if the income has anything to do with your business, whether or not it is on a full time, part time, or occasional basis, it is business income. Now, in regards to a business loan, how do you know if this is considered business income? Well, it gets a little tricky, but stick with me.

Is a business loan considered business income?
Most business loans are not considered business income. However, there are some exceptions. You will likely know if you are an exception as you won't have a typical case business loan. However, one notable exception is a situation in which you negotiate with a creditor or lender to reduce your debt. When this happens, if any debt is forgiven, the amount of debt forgiven acts as income, as it is a gain, so you will owe taxes on this amount. While that seems a bit odd, if you think of it as a negative positive, where negative is what is owed, and positive is income that is used to pay what is owed. So in other words, income is anything negated from your debt. Say you owe $40,000, and you get an income of $10,000, which you pay towards debt, and are forgiven $5,000 of your debt, then you only owe $25,000,which puts you at a gain (or income) of $15,000. Thus, tax for $15,000 must be paid.

Not only is a business loan typically not considered business income, it can also act as a tax break. For many small businesses, and even some large, business loans can offer substantial tax benefits.

How? Well, according to tax laws, the principal and interest you pay on your loan are business expenses, and you can deduct them from your taxes as such. Thus, the loan payment becomes a write off. However, in order to take advantage of this as a tax deduction, you must report the total amount of the loan, and the assets and expenditures financed must be necessary to operating the business. So, in other words, you have to A) prove you have a loan, and B) show (meaning have tangible proof, receipts, invoices, etc.) that the loan was used to run your business. (Not go on a vacation!)

While in generally a business loan is not considered taxable income, making sense of tax law is challenging, and you can still make mistakes. Rather than pay penalties, and steep fines, be honest, and get the help of a tax professional.

Do not make the mistake of succumbing to the temptation of hiding payments for future services as loans; a payment in exchange for goods or services (including a salary advance) is not a loan, and should not be reported as one. Record your business income honestly, call a loan a loan, and a payment a payment.