Running a business in South Africa is a constant juggle. You’re the CEO, the head of marketing, and often the chief coffee-maker. When you finally take that big step to get a business loan – maybe to buy that crucial piece of equipment or to expand your operations from your base – a hopeful question pops into your head: are business loans tax deductible?
It’s a great question, and the answer from SARS is a classic “yes and no.” But don’t worry, it’s not as confusing as it sounds.
Getting this right can make a real difference to your bottom line. So, let’s cut through the jargon and talk about what this actually means for you and your business in plain English.
First Things First: The Loan Itself Isn’t the Expense
Imagine you get a R100,000 loan. That money lands in your bank account. Has your business ‘spent’ anything? No. You’ve just got more cash to work with, and a new liability (the loan) on your books. Because you haven’t incurred an expense, you can’t deduct the R100,000 capital amount you borrowed. Repaying it is just like giving back the money you were holding.
So, what is the deductible part? It’s the cost of having that money in the first place.
The Magic Word: Interest
The interest you pay on your loan? Now that’s a different story.
Think of it like this: the loan capital is the ingredient (flour), but the interest is the cost of the recipe that tells you how to turn that flour into a cake that you can sell. The interest is the real cost of doing business, and SARS recognises this.
The interest portion of your business loan is almost always tax deductible, but it has to pass one simple, common-sense test.
The Big Test: Was it “In the Production of Income”?
This is the phrase SARS uses, but all it really means is: Did you use the loan to help your business make money?
You need to be able to draw a straight line from the loan to your business’s income-generating activities. If you can do that, you’re in the clear.
Let’s look at some real-world examples:
Clear-Cut Deductible Scenarios (The “Yes” Pile):
- You’re a local Durban-based construction company and you take a loan to buy a new bakkie. That bakkie is used every day to transport workers and materials to sites where you earn your income. The interest on that vehicle loan? Absolutely deductible.
- You run a growing online store and get a working capital loan to buy more stock before the busy Christmas season. You’ll sell that stock to make a profit. The interest on the loan? Yes, it’s deductible.
- You borrow money to pay for a targeted digital marketing campaign. The campaign directly brings in new leads and sales. The interest on that loan? You can deduct it.
Clear-Cut Non-Deductible Scenarios (The “No” Pile):
- You take out a business loan but use half of it to renovate your personal kitchen at home. The kitchen renovation has nothing to do with making money for your business. The interest on that portion of the loan is NOT deductible.
- You borrow money and then lend it to a family member, interest-free. Your business isn’t earning any income from this. The interest you’re paying the bank? Sorry, not deductible.
The rule of thumb is honesty and clarity. If the loan was genuinely for a business purpose that helps you trade and earn, you’re on safe ground.
What about those once-off loan fees?
Good question. Those setup fees or initiation costs that the lender charges to get the loan started? The same rule applies. If the interest on the loan is deductible, then these related admin fees are also considered a cost of doing business and are generally tax deductible in the year you pay them.
Our Final Word of Advice
So, back to the big question: are business loans tax deductible?
While the lump sum you borrow isn’t, the interest you pay along the way most certainly can be. It’s a legitimate business expense that can meaningfully reduce your tax bill at the end of the year.
The key is simply good record-keeping. Always be able to show SARS exactly how those loan funds were put to work to help your business grow.
A Friendly Disclaimer: We’re experts in finance, but not tax advisors! This info is for your guidance, but the world of tax can have its quirks. It’s always a smart move to have a quick chat with your accountant or a tax professional. They can give you advice tailored specifically to your business and make sure you’re getting everything right.
