Are SBA Loans Taxable Income For Small Businesses?
If your small business received SBA funding last year, our guide is here to spell out what impact it could have on your business's taxable income.
Filing your taxes can already be a hassle. But throw new business loans, grants, and subsidized loan payments in the mix, and tax time can seem like a real nightmare. If you received a Small Business Administration loan, grant, or other relief, you might be wondering how this will affect your tax return this year.
The good news is that in most cases, your tax liability won’t be impacted — at least on the federal level. You also won’t need a ton of additional paperwork to take to your accountant, although there are a few more documents you’ll need to include to get the most out of your tax return.
Keep reading to learn more about how SBA loans will affect your tax return and how you can be prepared this tax season.
Table of Contents
- What Are SBA Loans?
- Are SBA Loans Taxable?
- Types Of SBA Loans & Their Tax Requirements
- Are SBA Loan Subsidies Taxable?
- What Are The SBA Loan Tax Return Requirements?
- How To Save On Your Taxes
- SBA Loan Taxes FAQs
What Are SBA Loans?
Small Business Administration (SBA) loans are designed to provide small business owners with the capital they need to start or expand their businesses.
The SBA doesn’t operate as the lender for most SBA loans. Instead, the SBA guarantees a portion of each 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 options, such as bank loans.
SBA loans are more attainable and have competitive interest rates, high borrowing limits, and long repayment terms. These factors make SBA loans an ideal choice for many small businesses.
Are SBA Loans Taxable?
Like other types of small business loans, SBA loan proceeds are not counted toward a business’s taxable income. That means your tax liability will not increase due to receiving an SBA loan. In fact, in most cases, you may even be able to write off interest paid on your loan as a deduction on your tax return (something we’ll explore in-depth a little later).
The only time a loan will be taxed is if it is forgiven. If you were the recipient of a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL) Advance for COVID-19 relief, the good news is that in most cases, these forgiven funds are not taxable. However, we’ll dive into more specifics later in this post.
Types Of SBA Loans & Their Tax Requirements
We’ve already determined that most SBA loans are not counted as taxable income. Now, we’re going to take a closer look at each type of SBA loan and any specific requirements that may affect your next tax return.
Is An SBA 7(a) Loan Taxable?
An SBA 7(a) loan is one of the most popular SBA loans because funds can be used for nearly anything, has repayment terms of 10 to 25 years, and it allows borrowers to receive up to $5 million.
If you receive an SBA 7(a) loan, the proceeds are not counted toward your taxable income. And in most cases, you can deduct up to 100% of your SBA 7(a) loan interest payments to lower your income tax liability, provided you meet a few requirements.
To be eligible to deduct interest payments, you must:
- Be the person that is legally liable for the loan
- Have signed an agreement to repay the loan
- Have a true “debtor-creditor” relationship with the lender
There are some instances where you can’t deduct loan interest. Scenarios in which you would not be able to deduct interest from your tax return include:
- If you assumed debt or property from the original owner
- In the case of refinancing, interest is not deductible on funds from a second loan used to pay the first loan
- Capitalized interest can’t be deducted
Most borrowers should be able to deduct loan interest. However, if you’re in a unique scenario and are unsure, it’s always best to consult with a tax professional. Remember, deductions only apply to interest payments made. Any payment made toward the principal of your loan is not 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 loans is significantly shorter, making it a great option for businesses that need faster funding. The drawback 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 tax return. You may also be able to deduct up to 100% of your loan interest payments, provided you meet all requirements of the IRS.
Is An SBA Microloan Taxable?
The SBA Microloan program provides up to $50,000 for small businesses and not-for-profit childcare centers. Microloans are given to small business owners by nonprofit community-based organizations known as intermediaries.
SBA Microloan proceeds are not counted toward a business’s taxable income and do not need to be reported as such on an income tax return. Additionally, Microloan interest payments may be deductible, provided that all IRS requirements are met.
Are CAPLines Taxable?
The SBA CAPLines program offers four different lines of credit to eligible small business owners. Borrowers may receive a fixed or revolving line of credit up to $5 million under this program. These lines of credit are ideal for businesses that face unexpected expenses or have 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 from your tax return, qualifying interest paid on borrowed funds may be deductible, assuming that the deduction is an “ordinary and necessary” business expense and IRS requirements 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 can be used to purchase land, buildings, and long-term machinery and equipment. These loans can 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 received from the CDC/504 program are not counted toward your taxable income. You may also be eligible to deduct up to 100% of 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 options for small business owners. The Paycheck Protection Program (PPP) provided loans to small businesses to cover payroll expenses, rent, utilities, and other necessary expenses. If funds were spent on qualifying expenses, all or a portion of the PPP loan could be forgiven.
The Economic Injury Disaster Loan (EIDL) provides working capital loans to qualifying small business owners. Applicants for the EIDL could also potentially qualify to receive one or more grants, including the EIDL Targeted Advance and the EIDL Supplemental Targeted Advance.
The EIDL loan must be repaid, while the EIDL Advances grants do not have to be repaid. Small business owners could potentially receive the loan and one or more grants, while other small businesses may only qualify to receive one or more EIDL Advances.
How do these SBA programs affect your tax return when it comes to filing taxes? Let’s look at the PPP first. Funds received from the PPP do not count as taxable income, regardless of whether your loan was forgiven or not. Under the Coronavirus Aid, Relief, and Security (CARES) Act, PPP funds are exempt from federal taxation.
However, on the state level, things look a little different. In most states, PPP funds are not taxed. However, there are a few 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 are not allowed for expenses paid with PPP funds
Fortunately, most states do not require borrowers to include PPP funds as taxable income, and regular deductions are still allowed. But this is not the case for all states, so make sure you know the current tax laws for your state before filing your taxes.
EIDLs are not quite as complicated. EIDLs and EIDL Advances are not counted toward your taxable income. You can also write off eligible expenses paid for using EIDL funds to lower your tax liability. This applies to both the state and federal levels.
Check out our post on how PPP and EIDL affect your taxes to learn more.
Are SBA Disaster Loans Taxable?
If a disaster impacted your business, you might also have received an SBA Disaster Loan. These programs provide funding to qualifying small business owners affected by a declared disaster, such as a hurricane, wildfire, oil spill, or drought. There are four loan options available under this program, including Physical Disaster Loans and EIDLs.
Loan proceeds under the SBA Disaster Loan program are not counted toward your taxable income. You may also deduct loan interest paid and qualifying expenses on your tax return if you meet IRS requirements.
Are SBA Loan Subsidies Taxable?
Under the CARES Act, the SBA was required to offer COVID-19 relief through subsidized loan payments for 7(a) loans, CDC/504 loans, and Microloans. All businesses were eligible for at least six subsidized payments, while others may have qualified for as many as 14 payments depending on when the loan was obtained.
Further guidance for how these subsidized payments would be handled was released under the Taxpayer Relief Act of 2020. This legislation clarified that SBA loan subsidies are not counted as taxable income and are not to be reported on tax returns as such. Additionally, taxpayers are eligible to deduct interest payments and fees from these subsidies to lower their tax liabilities.
What Are The SBA Loan Tax Return Requirements?
For most taxpayers, receiving an SBA loan or grant won’t have a negative impact on your next tax return. In fact, you may be able to add deductions that can help lower your tax liability.
When it’s time to file your return, there are a few additional items you will need to bring to your accountant (or to have on hand if you plan to file yourself).
Here’s what you should gather in preparation for tax time:
- Loan agreements
- Records showing loan payments
- Records showing accrued interest
- Invoices, receipts, and other documentation to claim deductions
Unsure of everything you need to bring to your accountant for your next tax return? Check out our post on what your accountant needs from you for more information so that you can be ready for tax season.
How To Save On Your Taxes
In short, the funds you received from your SBA loan or grant are not counted toward your taxable income, at least on the federal level.
If you received a PPP loan, forgiven loan funds may count as taxable income on your state return, so make sure you understand the laws of your state before filing your return. You can also write off loan interest (in most cases) and expenses paid for using loan proceeds to lower your tax liability.
Check out our other resources to make sure you get the most out of your next tax return. Make sure you take advantage of all small business tax deductions and write-offs and correctly calculate payroll deductions, so there are no surprises this tax season.