Filing your taxes can already be an inconvenience. But throw new business loans, grants, and subsidized loan repayments in the mix, and tax season can feel just like a real nightmare. Should you received a small company Administration loan, grant, or any other relief, you may be wondering how this can affect your taxes this season.
The great news is the fact that generally, your tax liability won’t be impacted — at least on the federal level. You also won’t need a ton of more paperwork to consider to your accountant, either, although there are several extra documents you’ll have to include to obtain the most from your tax return. Continue reading to explore how SBA loans will affect your tax return, and how you can be prepared this tax season.
What Are SBA Loans?
Small Business Administration (SBA) loans are designed to provide small businesses using the capital they need to start or expand their businesses. The SBA doesn’t operate as the lender for many SBA loans. Instead, the SBA guarantees some of every loan, taking some of the risk off of traditional lenders. Because a portion of the loan is guaranteed, SBA loans are typically more attainable than other financing, for example loans from banks.
Not only are SBA loans more attainable, but they also have competitive interest rates, high borrowing limits, and long repayment terms. These factors make SBA loans an ideal choice for many smaller businesses.
Are SBA Loans Taxable?
Like other kinds of small business loans, SBA loan proceeds are not counted toward a business’s taxable income. This means that your tax liability won't increase because of receiving an SBA loan. In fact, generally, you may even be able to write off interest paid on your loan like a deduction on your tax return (something we’ll explore in-depth just a little later.)
The only time financing is going to be taxed is if it's forgiven. If you were the person receiving a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL) Advance for COVID-19 relief, the good thing is that in most cases, these forgiven funds are not taxable. However, we’ll dive into more specifics a little later in this article.
Types Of SBA Loans & Their Tax Requirements
We’ve already determined that most SBA loans aren't counted as taxable income. Now, we’re likely to take particular notice at each type of SBA loan and then any specific requirements that could affect the next tax return.
Is An SBA 7(a) Loan Taxable?
An SBA 7(a) loan is one of the most widely used SBA loans because funds can be used for nearly anything, it arrives with repayment terms of 10 to 25 years, and allows borrowers to get up to $5 million.
If you obtain an SBA 7(a) loan, the proceeds aren't counted toward your taxable income. And often, you can deduct up to 100% of your SBA 7(a) loan interest payments to reduce your income tax liability, provided you meet several requirements. To become permitted to deduct charges, you have to:
- Be the person that is legally liable for the loan
- Have signed an agreement to settle the loan
- Have a true “debtor-creditor” relationship with the lender
There are a few instances in which you can’t deduct loan interest. Scenarios in which you would not be in a position to deduct interest out of your taxes include:
- If you assumed debt or property from the original owner
- In the situation of refinancing, interest rates are not deductible on funds from the second loan used to pay the first loan
- Capitalized interest can’t be deducted
Most borrowers will be able to deduct loan interest. However, if you’re inside a unique scenario and are unsure, it’s always best to see with a tax professional. Remember, deductions only apply to interest payments made. Any payment made toward the main of your loan isn't tax-deductible.
Is An SBA Express Loan Taxable?
An SBA Express loan is similar to the 7(a) loan with just a few key differences. Generally, the turnaround time for these financing options is significantly shorter, making it a great choice for businesses that need faster funding. The drawback, though, is that the maximum borrowing amount is just $350,000.
Similar to the 7(a) loan, Express loan proceeds are not counted as taxable income on your taxes. You may also be able to deduct as much as 100% of your loan charges provided you meet all requirements from the IRS.
Is An SBA Microloan Taxable?
The SBA Microloan program provides as much as $50,000 for small businesses and not-for-profit childcare centers. Microloans receive to small businesses by nonprofit community-based organizations known as intermediaries.
SBA Microloan proceeds aren't counted toward a business’s taxable income and do not need to be reported as a result with an tax return. Additionally, Microloan interest payments can also be deductible so long as all IRS requirements are met.
Are CAPLines Taxable?
The SBA CAPLines program offers four different credit lines to eligible small businesses. Borrowers may get a fixed or revolving line of credit up to $5 million under the program. Wrinkles of credit are ideal for businesses that face unexpected expenses or face short-term or seasonal working capital needs.
Similar to other SBA loans, funds received from the CAPLines program are borrowed funds and are not considered taxable income. While principal payments can’t be deducted out of your taxes, qualifying interest paid on borrowed funds may be deductible assuming that the deduction is definitely an “ordinary and necessary” business expense and requirements from the IRS are met.
Is A 504 Certified Development Company Loan Taxable?
The SBA’s CDC/504 program offers long-term loans of up to $5 million. Loan proceeds may be used to purchase land, buildings, and long-term machinery and equipment. These financing options may also be used for new construction, renovations to existing facilities, or improvements and modernizations for land, streets, parking lots, and landscaping.
Like other SBA loans, proceeds caused by the CDC/504 program aren't counted toward your taxable income. Additionally, you may even be eligible to deduct up to 100% of great interest payments made if you meet all IRS requirements.
Are PPP & EIDL Loans Taxable?
In response to the COVID-19 pandemic, the SBA offered several relief choices for small businesses. The Paycheck Protection Program (PPP) offered loans to small businesses to cover payroll expenses, rent, utilities, and other necessary expenses. If funds were allocated to qualifying expenses, all or part of the PPP loan might be forgiven.
The Economic Injury Disaster Loan (EIDL) provides capital loans to qualifying small business owners. Applicants for that EIDL may also potentially qualify to receive a number of grants, including the EIDL Targeted Advance and the EIDL Supplemental Targeted Advance. The EIDL is really a loan that must definitely be repaid, while the EIDL Advances are grants that don't have to be repaid. Small businesses could potentially get the loan and one or even more grants, while other smaller businesses may qualify to get a number of EIDL Advances.
When you are looking at filing taxes, how can these SBA programs affect your tax return? Let’s look at the PPP first. Funds caused by the PPP don't count as taxable income, whether or not your loan was forgiven or not. Under the Coronavirus Aid, Relief, and Security (CARES) Act, PPP money is exempt from federal taxation.
However, around the state level, things look quite different. In many states, PPP funds are not taxed. However, there are some exceptions. Based on your state’s laws, you may find that:
- All PPP loan funds are counted as taxable income for state tax purposes
- Some businesses must include PPP loan funds as taxable income for state tax purposes
- Some or all expense deductions aren't allowed for expenses paid with PPP funds
Fortunately, most states don't require borrowers to incorporate PPP funds as taxable income, and regular deductions continue to be allowed. However this is not the case for those states, so be sure you be aware of current tax laws for the state before filing your taxes.
EIDLs aren't as complicated. EIDLs and EIDL Advances aren't counted toward your taxable income. You can also write off eligible expenses taken care of using EIDL funds to reduce your tax liability. This applies to both the state and federal levels.
Check out How Will PPP Loans & EIDL Advances Affect My State & Federal Taxes? to find out more.
Are SBA Disaster Loans Taxable?
If your business was impacted by a disaster, you may even have obtained an SBA Disaster Loan. These programs provide funding to qualifying small businesses which were influenced by a declared disaster, such as a hurricane, wildfire, oil spill, or drought. You will find four loan possibilities under the program, including Physical Disaster Loans and EIDLs.
Loan proceeds under the SBA Disaster Loan program are not counted toward your taxable income. You may even deduct loan interest paid and qualifying expenses on your taxes if you meet IRS requirements.
Are SBA Loan Subsidies Taxable?
Under the CARES Act, the SBA was forced to offer COVID-19 relief through subsidized loan repayments for 7(a) loans, CDC/504 loans, and Microloans. All businesses were entitled to at least six subsidized payments, while some may have qualified as many as 14 payments based on when the loan was obtained.
Further guidance for how these subsidized payments would be handled was launched under the Taxpayer Relief Act of 2022. This legislation clarified that SBA loan subsidies aren't counted as taxable income and are not to be reported on tax statements as such. Additionally, taxpayers are also eligible to deduct interest payments and costs from these subsidies to lessen their tax liabilities.
What Would be the SBA Loan Taxes Requirements?
For most taxpayers, receiving an SBA loan or grant won’t have a negative impact on the next tax return. Actually, you may be in a position to add deductions that will help lower your tax liability.
When it’s time for you to file your return, there are some additional items you will have to provide an accountant (or to have on-hand, if you plan to file for yourself). Here’s what you need to gather when preparing for tax season:
- Loan agreements
- Records showing loan payments
- Records showing accrued interest
- Invoices, receipts, along with other documentation to claim deductions
Unsure of all things you need to provide your accountant for your next taxes? Take a look at What Information Does My Accountant Have to Prepare My Taxes? to learn more so that you can be ready for tax season.
How To Save On Your Taxes
In short, the funds you caused by your SBA loan or grant are not counted toward your taxable income, at least around the federal level. If you received a PPP loan, forgiven loan funds may count as taxable income in your state return, so be sure you comprehend the laws of the state before filing your return. You may also discount loan interest (generally) and expenses paid for using loan proceeds to lower your tax liability.
Make sure you receive the most out of the next taxes by looking into our other resources. Make sure you take advantage of all small business tax deductions and write-offs and correctly calculate payroll deductions there are no surprises this tax season. Best of luck!
