Are Business Loans Tax Deductible? What You Need to Know in 2025

For many small business owners, tax season often raises an important question: are business loans tax deductible? While the borrowed amount itself is not deductible, in most cases, the interest paid on a business loan may be. Understanding what qualifies and how to claim it can help reduce your taxable income and keep you compliant with IRS rules.

In this guide, we’ll break down what parts of a business loan may be deductible, the requirements under U.S. tax law, and strategies to properly track and report loan-related expenses.

Is a Business Loan Deductible?

No, the principal (original borrowed amount) is not tax deductible. However, the interest on the loan may be deductible—provided it meets certain criteria.

What the IRS Says

According to IRS Publication 535: Business Expenses, “To be deductible, the interest must be on a genuine debt and used for a business purpose.” You must also be legally liable for the debt and have a bona fide debtor-creditor relationship.

What Parts of a Business Loan Are Tax Deductible?

1. Non-Deductible: Loan Principal

The money you receive from a loan is not considered income, and repaying it is not an expense. Therefore, loan principal payments are not deductible from your taxes.

2. Potentially Deductible: Loan Interest

The interest you pay on a qualified business loan is typically deductible as a business expense.

Key IRS criteria for deductibility:

• You are legally obligated to repay the loan.
• The loan was used strictly for business purposes.
• The lender is not a related party (e.g., a friend or family member without a formal contract).

Source: IRS Publication 535 – Business Expenses (irs.gov)

Types of Business Loans and Their Tax Treatment

a. Term Loans

Interest on term loans (loans with fixed payments over a defined period) is usually 100% deductible if used for business purposes.

b. Business Lines of Credit

Only the interest on the funds actually drawn is deductible—not on the entire credit limit.

c. SBA Loans

Interest is deductible. However, fees such as SBA loan guarantee fees or packaging fees may not be. Consult your accountant for proper classification.

d. Business Credit Cards

Interest on business-related purchases made with a business credit card is deductible. Be careful not to mix personal and business expenses.

e. Merchant Cash Advances

These are complicated. Often, the fees aren’t classified as “interest” under IRS rules and may not be deductible. It’s wise to get advice from a tax professional.

Deductible Loan-Related Expenses (If Applicable) Depending on your loan’s terms and usage, you may also be able to deduct:

• Interest charges (Sec. 163, Internal Revenue Code)
• Amortized loan origination fees
• Legal fees related to obtaining the loan
• Appraisal or documentation costs tied to business asset financing (e.g., equipment)

Mixed-Use Loans: Only Deduct What’s Business-Related If you use part of your loan for personal expenses, only the portion used for business qualifies for interest deductions.

Example:

Loan amount: $10,000

• $7,000 used for inventory (business)
• $3,000 used for personal expenses

Only 70% of the interest paid is deductible.

Always maintain detailed records, including receipts and loan breakdowns, to support these claims if you’re audited.

Record-Keeping Tips to Stay IRS Compliant

• ✔ Use Separate Business Accounts Never mix business and personal finances. Open dedicated business checking and credit accounts
• ✔ Track Loan Documentation Keep signed loan agreements, amortization schedules, payment receipts, and financial statements.
• ✔ Consult a Tax Advisor or CPA IRS guidelines can be complex. A licensed CPA or enrolled agent can ensure you’re maximizing your legal deductions.

IRS Red Flags to Avoid

Avoid these common audit triggers:

• Deducting loan principal
• Claiming interest on personal loans
• Failing to separate mixed-use loans
• Deducting the same expense twice (via loan and again as a cost)

Tip: Retain your tax and loan documents for at least seven years.

How to Maximize Business Loan Deductions

1. Borrow Strategically

Only take what you need. Avoid unnecessary debt, which may lead to interest that’s not deductible.

2. Use Funds on Deductible Business Expenses

Invest in qualifying expenses like:

• Equipment (also eligible for Section 179 depreciation)
• Inventory
• Advertising and marketing
• Payroll and operational costs

3. Time Your Loan Wisely

Taking a loan late in the tax year? Interest paid before December 31 may be deductible in that year.

4. Bundle Deductible Expenses

Use loan funds to purchase depreciable assets like computers, vehicles, or machinery. You may be able to combine loan interest deductions with depreciation or Section 179 deductions.

Final Thoughts

Are business loans tax deductible? Not entirely—but the interest usually is if used for legitimate business purposes.

Understanding IRS rules and maintaining solid documentation is essential to staying compliant and lowering your tax liability. When in doubt, consult a tax professional to guide you through the complexities.

If you’re planning to apply for a business loan this year, structure it with taxes in mind from day one. It can save you time, money, and stress when tax season arrives.

References:

• IRS Publication 535, Business Expenses: https://www.irs.gov/publications/p535
• Internal Revenue Code Section 163 – Interest Deduction

Need expert help with your business taxes? Speak to a qualified tax advisor today to ensure your loans and deductions are properly accounted for.