Is business loan interest tax deductible?

The General Rule: Business Loan Interest Is Deductible

Under IRC Section 162, interest paid on a loan used for business purposes is deductible as an ordinary and necessary business expense. This applies to interest on term loans, lines of credit, SBA loans, equipment financing, and most other commercial lending products. The deduction reduces your taxable income — so a business paying $20,000 in annual loan interest in the 21% corporate tax bracket saves $4,200 in federal income tax.

Documentation Requirements

To claim the deduction, you must be able to substantiate the interest paid. Lenders typically issue year-end statements showing total interest paid — similar to a mortgage Form 1098 but not necessarily on that specific IRS form. Keep these statements with your tax records. If you use a loan for mixed business and personal purposes, you can only deduct the business-use portion — and you must track the allocation. The IRS applies the tracing rules under Treasury Regulation §1.163-8T to determine which interest is deductible when funds are commingled.

• Retain year-end lender interest statements for every business loan
• Mixed-use loans: track and document the business-use percentage — only that portion is deductible
• Cash-basis taxpayers: deduct when interest is actually paid, not when accrued
• Accrual-basis taxpayers: deduct when interest is accrued, not necessarily when paid
• Loan origination fees (points): often amortized over the loan term, not deducted all in year one

Section 163(j) Business Interest Limitation

The Tax Cuts and Jobs Act (2017) added IRC Section 163(j), which limits business interest deductions to 30% of adjusted taxable income (ATI) for businesses with average annual gross receipts exceeding $32 million (2026 threshold, inflation-adjusted). Most small businesses fall well below this threshold and are fully exempt from the limitation. If your business has $32M or less in average annual gross receipts, Section 163(j) does not affect your interest deduction.

SBA EIDL Interest Deductibility

SBA Economic Injury Disaster Loans (EIDL) issued during COVID-19 carry interest rates of 3.75% for businesses and 2.75% for nonprofits. The IRS confirmed that EIDL interest is deductible as a business expense — the retroactive clarification in 2022 confirmed that even EIDL loans with deferred payment periods generate deductible interest when it accrues or is paid. If you have an outstanding EIDL, track and deduct your interest annually using the year-end interest statement available through the MySBA Loan Portal.