Acquiring a loan to finance or rather boost business is quite common among different business owners. However, one needs to be cautious when taking the loan and the kind of loan you take since the financial flow in a company is also affected by taxation. This brings us to the question whether all the business loans are tax-deductible or not. For example, when you take out a loan to finance your business.
This kind of loan is preferred by the majority of big companies considering they are long term loans that are also charged at lower interest rates compared to the short term loans.
However, different states have different tax deduction rules that revolve around the kind of loan you take. We are going to discuss how a loan for a business is taxed or tax deducted in Australia.
ATO also referred to as Australia Taxation office agency is the statutory agency and the only principal departments involved in revenue collection in Australia. We will review some of the frequently asked questions regarding loan and business, and how ATO views the kind of loans.
Q1: Can a business loan be written off?
All the money or expenses you incur in the business to keep it running and growing are deductible. This is because this is not an income for the company but rather an expenditure (“loss”).
When it comes to loan cases, not the entire money you borrow from the lender will be tax deducted. Meaning, only the loan that involves activities that earn the business an income are deductible. Or if the money is used to cater for expenses and the income can be traced.
If the loan is used to fund activities that do not earn the business a payment, then only part of the loan will be deducted, and in most cases, it’s the interest.
Let’s break it down
If your loan involves paying back an interest accrued as a result of expenses for running a business, then the interests are written off when paying the tax.
But, if the money or the interest accrued was as a result of personal fulfilment, perhaps a trip to Dubai, then none will be written off. This is because this is not a business liability but personal.
Q2: Is the loan a taxable income?
This is determined by the lender and the kind of loan you take. Usually, take out loans, also referred to as long terms loans are the kind of loans you take without necessarily involving collateral. Such loans are not included in tax income books. This is the money you agree with the lender to pay after a specific period.
But, if part of the loan is written off or forgiven, then the forgiven amount of taxable. For example, if you had borrowed 30,000 dollars and the lender forgives you 5,000, then the 5,000 dollars is included as taxable.
However, if the loan is short term and involves collateral such as from a bank or online lender, then the type of loan will be taxable.
Q3: Is a loan repayment a business expense?
No! This is because you are borrowing the money to run or finance your business. It does not matter the kind of expense you pay with the loan as long it is related to your business or any other business. So, paying back the loan to the lender is classified as business expenses that you will incur. However, if the loan has incurred interest, then the interest amount is categorized as an expense.
Q4: Which expenses are written off?
Other expenses that are tax-deductible in business are;
- The credit card interests
- Tax preparation expenditure
- Education fee
- Health care tax
- Professional fees and insurance payments
Before you take a loan for your business or personal use, these are crucial details that you need to know about. The information will guide you to determine the right loan that will work for your business. For example, take out unsecured loans are some of the best loans to take for boosting the company since they are tax-deductible.
The Australian Tax Office has released its standards to make things easier for Business Loans Written Off. There is information on the website, including how to take advantage of these new offerings.
Do you think you may qualify for these WRITTEN OFF? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.