SBA Loans and Taxation: Everything You Should Know

Taxes can be some of the biggest administrative and financial burdens for small business owners, which is why you should always be exploring ways to reduce your tax liability.

One way to take more money off the table is through a Small Business Administration or SBA loan.

SBA loans are available to small businesses and startups and come with a government-backed guarantee. This guarantee offers serious credibility, which lowers interest rates and delivers more favorable terms than other types of loans.

But before you start filling out an application, it’s important to familiarize yourself with SBA loan tax return requirements. 

What are SBAs?

The Small Business Administration (SBA) is a federal agency that provides support to small businesses through a variety of programs and services. One of the most popular programs offered by the SBA is their loan scheme, which offers financial assistance to small businesses.

While the SBA does not directly lend money to small businesses, the agency offers guarantees for a portion of the loan, making it easier for small businesses to get approved for financing.

One of the most important things to keep in mind is that SBA loans are not taxable. This means that your tax liability won’t increase, and you won’t have to factor in the taxes.

Moreover, you can get a tax return on interest payments if you meet certain requirements. 

The Different Types of SBA Loans and Taxation

There are a few different types of SBA loans, each with its own terms and conditions. Picking the right small business loan comes down to your specific needs and financial situation.

7(a) Loans and Taxation

When it comes to SBA loans, the 7(a) loan is one of the more popular options. This loan is typically used for working capital, inventory, or equipment purchases. The maximum amount you can borrow with a 7(a) loan is $5 million.

Considering the large sum of money that you can get through this loan, it’s perfectly understandable if you’re still asking yourself, is an SBA loan taxable? But the answer is still no. 

7(a) loans are also an attractive option for small businesses because you can deduct up to 100% of the interest payments if you meet certain requirements. 

504 Loans and Taxation

The SBA 504 loan program is designed to help small businesses finance the purchase of fixed assets, such as real estate or equipment. The maximum amount you can borrow is $5.5 million. This SBA loan does not appear on tax returns as it’s not counted toward your taxable income. 

Microloans and Taxation

The SBA Microloan program provides small businesses with loans of up to $50,000. These loans can also be used for inventory or equipment purchases and are not subject to taxation.

Paycheck Protection Program and Similar Loans

As part of its COVID-19 relief program, the SBA extended a helping hand to small businesses struggling with everything from rent to payroll expenses. This assistance came in the form of the Paycheck Protection Program or PPP.

If businesses use the funds to cover qualifying expenses, the loan can be forgiven. Another program is the Economic Injury Disaster Loan or EIDL that offers funds to eligible businesses.

The taxability of SBA debt relief depends on your location. On a federal level, the funds are exempt for taxation. But some states consider PPP loan funds as taxable income.

SBA Loans and Tax Deductions

We’ve already touched on the fact that SBA loans aren’t taxable income, which makes them an attractive option for businesses. SBA loans can also help you save money  because the interest is tax-deductible.

In addition, if the funds are used to purchase equipment or other assets, the business may be able to depreciate those assets.

SBA Loans and Tax Return Requirements

When filing your SBA loan tax return, you'll need records of all the loan payments, accrued interest, and the original loan agreements.

Also, remember that you can claim deductions on any interest you paid on the loan during the year. This can be a substantial amount, so be sure to take advantage of it.

You can always get more information about the tax treatment of SBA loan payments from the IRS. 

If you used the loan to purchase equipment or other assets for your business, you may be able to depreciate those assets. This can also save you a significant amount of money when you’re filing your returns.

When SBA Loan Interest Is Not Tax Deductible 

As with most loans, the interest on an SBA loan is tax deductible. However, there are a few exceptions. 

Specifically, if you use the proceeds from your SBA loan for personal use, the interest on the loan is not tax deductible. If you default on your SBA loan, the interest on the loan may not be tax deductible.

Also, if you use an SBA loan to settle existing business debts or refinance another loan that was used for business purposes, the SBA loan payments are taxable.