Thursday, 31st March 2022 | Small business financing Canada,Management
Is a business loan taxable income?
As a business owner, you must have questions pertaining to loans and taxes. Read our blog below to understand how taxes work when it comes to business loans in Canada.
One of the most common questions business owners ask is whether business loans are taxable or not. Business loans in Canada are not taxable income. You will not be taxed on a business loan delivered to your business account. Instead, you pay taxes on the money you make. While some individuals consider company loans as a source of revenue, you are not earning this money. As a result, you will not be taxed on the money deposited into your company bank account when you get your loan.
However, just because your company loan isn't considered taxable income doesn't mean it's tax-free. There is one exception to the rule that loans are not taxable income, and that is when you negotiate a debt reduction with a bank or lender. When a debt is forgiven, you must pay taxes on the amount discounted.
Many individuals are concerned about the amount of taxes they would have to pay as a business owner, yet starting a business is advantageous in many ways as enterprises are eligible for a tax deduction.
Are business loan payments tax deductible?
Unfortunately, payments on company loans are not tax-deductible. The loan is not taxable income, so you don't have to pay any taxes when you get it. However, you won't be able to deduct principal loan payments while repaying the loan. You are returning the money you borrowed rather than the money you spent. It might be a huge letdown for many individuals, but there's no need to be concerned.
Even though you will not be able to deduct your loan repayments from your taxes, there are many other elements of your business where you will be able to deduct your taxes. Interest paid on your company loan, for example, is usually tax-deductible.
As a result, you will not be eligible for a reduction in the total cost of your loan repayment. You will, however, be allowed to deduct the interest component of this payment. Interest is a business expenditure, and business expenses are tax-deductible.
How small business loans in Canada affect taxes
Getting a small company loan might impact your taxes, even if you don't pay income tax on it. Here's how it works:
Interest repayment
Small business loans are structured such that your loan payments are balanced between paying interest and repaying the principal.
The portion of your payment that goes toward interest is tax-deductible, lowering your taxable income and allowing you to pay less in taxes than you would otherwise. You must have a real debtor-creditor connection with the lenders to take advantage of this tax deduction (money borrowed from friends and relatives does not count, even if you pay the interest).
Typical business expenses you can deduct
In addition to interest on business, money must be spent on assets and expenses required to run your firm. If you use the money for something else, the interest isn't deductible as a company expenditure.
There are other regular expenses essential to running your business that are likely to be deductible. They include the following:
- Home office
- Commercial rent
- Utilities
- Employee salaries
- Marketing
Typical business expenses you can't deduct
Certain costs are not deductible, even if they seem typical or essential. Here are some examples:
- Expensive gifts to clients
- Commuting expenses
- Entertaining clients
- Contributions to political agendas
Why work with iCapital?
The majority of business loans in Canada are not taxed. You can probably deduct any interest you pay from your taxable income if you pay one installment off.
When it comes to taxes, there are always exceptions. If you're unclear about the legality of any business deduction you should consult iCapital, which can provide you with multiple stress-free financing options.
iCapital focuses on what's essential for you! You get the money you need and the excellent customer service and attention you deserve when working with iCapital. Contact us today to take advantage of our 98% application approval rate.
Read Also