Business Loans as Taxable Income

Understanding and interpreting business tax law is a daunting task. For example, is a business loan considered taxable income or business income?

Understanding business income and taxable income

First of all, what is "business income"? Basically if the income has anything to do with your business, whether it is on a full-time, part-time, or occasional basis, it is business income. Most business loans are not considered business income.

One notable exception is a situation in which you negotiate with a creditor or a lender to reduce your debt. If any debt is forgiven, you will owe taxes on the amount.

Business loans can offer substantial tax benefits. The interest you pay on your loan is considered a business expense, and you can deduct it from your taxes. In order to take advantage of a tax deduction, the assets and expenditures financed must be necessary to operating the business.

More articles from AllBusiness.com:

• Tax Issues to Consider Before Selling a Business
• Laws Every Small Business Needs to Know
• 8 Important Questions to Ask Before Taking Out a Business Loan
• 10 Key Steps to Getting a Small Business Loan
• Understanding the Projected Income Statement

Know how tax laws affect you

Making sense of tax law is challenging, and some people may make blunders that end up costing them dearly. Do not be tempted to hide payments for future services as loans; a payment in exchange for goods or services (including a salary advance) is not a loan.

If you have any doubts or questions about how to record business income, confer with your tax advisor.

RELATED: 11 Business Deductions Even the Smallest Business Can Claim