Tax Write-Offs for Business Loans: What You Can Deduct in 2026

Tax Write-Offs for Business Loans: What You Can Deduct in 2026

Business owners often underestimate how much of their financing costs are tax-deductible. Interest payments, fees, and the assets purchased with loan proceeds can all generate meaningful deductions that reduce your taxable income. Understanding exactly what you can write off — and structuring your borrowing to maximize those deductions — is one of the most practical financial skills a business owner can develop.

This guide breaks down every deductible component of business financing, explains how to claim each deduction correctly, and provides examples that show the real dollar impact.

Deductible Components of Business Loans

Loan Interest Payments

The most straightforward deduction is loan interest. The IRS allows businesses to deduct interest paid on loans used for business purposes. This applies to:

• Term loans — fixed monthly interest payments are fully deductible
• Lines of credit — interest on drawn amounts is deductible
• SBA loans — all interest is deductible as a business expense
• Equipment financing — the interest portion of each payment is deductible
• Commercial mortgages — interest on business property loans is deductible

Important limitation: The Tax Cuts and Jobs Act limits the business interest deduction to 30 percent of adjusted taxable income for businesses with average annual gross receipts exceeding $29 million over three years. Most small businesses fall below this threshold and can deduct all business interest.

Loan Origination Fees

Fees charged by lenders to process and fund your loan are deductible. For loans with terms of one year or less, origination fees can be deducted in full in the year they are paid. For longer-term loans, the fees must be amortized over the life of the loan.

Example: A $200,000 SBA loan with a 2 percent origination fee generates a $4,000 fee. On a 10-year loan, you would deduct $400 per year over 10 years.

Guarantee Fees

SBA loans carry a guarantee fee paid to the Small Business Administration. This fee, which ranges from 0 to 3.75 percent depending on the loan amount and term, is deductible. Like origination fees, it is typically amortized over the life of the loan.

Equipment Depreciation and Section 179

When you use loan proceeds to purchase equipment, the equipment itself becomes a depreciable asset. You have two options:

Section 179 deduction: Write off the entire purchase price (up to $1.16 million for 2026) in the year the equipment is placed in service. This creates the largest single-year tax benefit.

Bonus depreciation: Deduct 60 percent of the cost in the first year (for 2026), with the remaining balance depreciated over the asset's useful life using MACRS schedules.

Standard MACRS depreciation: Spread the deduction over the asset's class life — 5 years for computers and vehicles, 7 years for office furniture and most equipment, 15 years for land improvements.

The choice between these methods depends on your income level, tax bracket, and long-term tax strategy. Your CPA can model the scenarios to determine which approach saves you the most.

Vehicle Deductions

Vehicles financed for business use offer several deduction paths:

• Section 179 deduction for vehicles over 6,000 pounds GVWR (SUVs, trucks, vans) — up to $28,900 for passenger vehicles under 6,000 pounds in 2026, or the full purchase price for heavier vehicles
• Actual expense method — deduct the business-use percentage of financing interest, fuel, insurance, repairs, and depreciation
• Standard mileage rate — $0.67 per business mile for 2026 (if you choose this method, you cannot deduct actual vehicle expenses)

Renovation and Improvement Costs

Loan proceeds used for business renovations may qualify for the de minimis safe harbor election, allowing you to expense items costing $2,500 or less per invoice in the current year. Larger improvements are capitalized and depreciated, with qualified improvement property eligible for bonus depreciation.

What Is NOT Deductible

Understanding the boundaries is just as important:

• Loan principal repayment — only interest is deductible, not the principal portion of your payment
• Personal expenses — if any portion of the loan is used for personal purposes, that portion is not deductible
• Fines and penalties — late payment penalties to lenders are generally not deductible
• Capitalized interest — interest that is added to the cost basis of an asset under construction is not directly deductible but is recovered through depreciation

Calculating Your Real After-Tax Cost of Borrowing

The deductibility of business loan interest effectively reduces your borrowing cost. Here is how to calculate it:

After-tax interest rate = Stated rate x (1 - effective tax rate)

Example: A business loan at 10 percent APR for an owner in the 24 percent tax bracket has an effective after-tax cost of 7.6 percent (10% x 0.76). On a $100,000 loan, that is $2,400 per year in tax savings from the interest deduction alone.

When you combine the interest deduction with Section 179 on the purchased asset, the total first-year tax benefit can be dramatic.

Full example: A construction contractor finances $150,000 in equipment at 9 percent APR over 5 years.

• Year 1 interest: approximately $12,800 (deductible)
• Section 179 deduction: $150,000
• Total deductions: $162,800
• Tax savings at 24 percent rate: $39,072
• Year 1 loan payments: approximately $37,100
• Net year 1 position: the tax savings exceed the loan payments

Record-Keeping Requirements

To claim these deductions, you need proper documentation:

• Loan agreement showing the terms, interest rate, and fees
• Payment records with interest and principal breakdowns (your lender provides a 1098 or year-end statement)
• Purchase invoices for equipment bought with loan proceeds
• Delivery confirmation proving the placed-in-service date for Section 179
• Business use logs for vehicles and any assets with mixed personal/business use

Timing Your Deductions

Cash-basis taxpayers deduct interest when it is paid. If you make a January loan payment in late December, the interest is deductible in the earlier year.

Accrual-basis taxpayers deduct interest when it is incurred, regardless of when payment is made. This means interest that accrues in December is deductible for that year even if the payment is not due until January.

Understanding your accounting method is essential for timing deductions correctly.

Maximize Your Deductions with Brevo Capital

Every dollar of deductible financing cost reduces your tax burden. At Brevo Capital, we connect business owners with lending partners who offer transparent terms that make it easy to track and claim your deductions.

Apply now and explore tax-smart financing options for your business.

---

Frequently Asked Questions

Can I deduct interest on a merchant cash advance?

Merchant cash advances are technically purchases of future receivables, not loans, so the fee structure differs from traditional interest. However, the costs associated with MCAs may still be deductible as business expenses. Consult your CPA, as the IRS treatment of MCA fees continues to evolve.

What if I use a business loan for both business and personal expenses?

You can only deduct the portion of interest attributable to business use. If you use 80 percent of a loan for business and 20 percent for personal expenses, only 80 percent of the interest is deductible. Keep clear records to support your allocation.

Do I need to itemize to deduct business loan interest?

No. Business interest is deducted on your business tax return (Schedule C, Form 1120, 1120-S, or 1065), not on Schedule A. It reduces your business income directly, regardless of whether you itemize personal deductions.

Can startups deduct loan interest before generating revenue?

Yes, though pre-revenue interest may need to be capitalized as a startup cost and amortized over 15 years once the business begins operations. The first $5,000 of startup costs can be deducted in the year you begin business, with the remainder amortized.

Is there a limit on how much business interest I can deduct?

For most small businesses with gross receipts under $29 million, there is no limit. Larger businesses are subject to the 30 percent of adjusted taxable income limitation under Section 163(j). If your business is growing rapidly, discuss this threshold with your CPA.