How to Claim Tax Deductions on Your Business Loan Expenses

Business loans play an instrumental role in navigating business expenses and investments for the future. If you are a small business owner, chances are you have borrowed funds or considered taking a loan. However, many business owners do not know they can claim tax deductions on expenses associated with their business loans. Credit options like Business loans, Assets & equipment finance can help you fund legitimate business activities. When you incur costs on such a source of finance, you can claim deductions on the same. Let’s break down what the tax rules say about expense claims for business loans and what you should do!

Tax Governance For Your Business: Guidelines From The Australian Taxation Office (ATO)

The ATO has laid down essential guidelines for small businesses and how they manage their debts. The following points highlight some of the key things to keep in mind:

• Loan Contract: You should have a legally-binding contract with specific loan terms. It requires appropriate execution, including all variations.
• Record-Keeping: Every business should follow sound accounting practices to record transactions related to their loan account. Moreover, you should also record details of gifting in your financial records.
• Compliance: Businesses must comply with their constitutions or trust deeds when they borrow from related parties or trust funds. They need to follow taxation requirements while finalising the loan terms.

What Do The Tax Rules Say About Deductions On Business Expenses?

Australia’s tax rules state that firms can claim tax deductions on any expense undertaken for business activities. Hence, the amount spent on servicing a business loan is eligible for deductions. The principal amount repaid with every instalment cannot be included in the deductions. The eligible components for tax deductions include the following:

• The interest amount.
• The additional fees and costs incurred for a loan account.

Claiming Deduction On Your Loan Expenses: What You Should Keep In Mind

Business owners must be careful while filing their claims. Here are the tips that can help you navigate this process:

• Maintain Regular Records: Regular record-keeping will help you keep track of all loan-related business expenses. Tax officials may demand an explanation or seek proof if they flag certain claims as suspicious. In such scenarios, having detailed and consistent records can help you submit evidence and show a paper trail.
• Claim Legitimate Expenses: You can claim only business-related expenses for tax deductions. For example, in Assets and equipment finance, the entire amount goes towards buying an asset for business use. In this case, you can charge all the interests and costs for tax deductions. However, if you use a part of your loan amount for personal purposes, you cannot claim any deductions for the interest chargeable on that amount. You must calculate your legitimate claims accordingly to stay on the right side of the law.
• Consult An Expert: A loan expert can help you understand the taxation rules applicable to your business structure. Analyse your loan terms and take the advice of a professional before claiming your deductions.

If you want to know more about business loans and what you can do with them, speak to the Broc Finance team today!