Small Business Term: Tax Deductions for Interest Paid on Business Loans

If you’re like most business owners, you’ve probably taken out a loan for your business or at least thought about it. Luckily, the Inland Revenue Authority of Singapore considers the interest on your loan to be a business expense, and as a result, you can deduct the interest on your tax return.

In addition, if you buy any equipment on a hire purchase agreement, you can also deduct the interest associated with that purchase. Typically, with a hire purchase agreement, you make a down payment on a large piece of equipment, and then you pay off the balance plus interest over time.

In both cases, you can’t write off the principal of the loan, but of course, you can deduct any business purchases you make with the loan. To explain, imagine you take out a S$3,000 loan to buy new computer equipment. You can’t claim the S$3,000 as a business expense right away, but once you buy the computers, you can write off that expense just as you do any business purchase. Since this is a large purchase, it may be considered a capital expense, which means you write it off slowly over time.

Then, as you pay back the loan, you can claim the interest as a business expense. For instance, if you make a S$250 payment, and S$220 goes to the principal while the remaining S$30 is for interest, your deduction is for S$30. Keep in mind this only applies to business loans. You can’t write off interest for personal loans as business expenses.

To support your claim, keep records of your payments. You may also want paperwork or receipts that prove you took out the loan for business purchases. To make this process easier, consider using cloud-based accounting software such as QuickBooks, which can help you track your interest payments as well as other business purchases you make.