Business credit and taxes serve two very different purposes. Business credit refers to records of a business’s past credit activity which can enable future borrowing and opportunities. Taxes, on the other hand, are mandatory amounts businesses and individuals have to pay to support federal, local, and state governments each year. Though the IRS tends to focus more on your income and expenses than your borrowing power, business credit can still have tax implications in certain situations. Here are 4 things to keep in mind as you build business credit and plan for taxes.
4 ways business credit can impact your taxes
As you begin to build and use credit, you may influence your taxes in the following ways.
1. Business interest is deductible
When you get approved for a business credit product like a loan or credit line, lenders typically charge interest until you pay off the loan in full. However, you can generally write that interest off if you used the funds to cover business expenses.
For example, suppose your business earned $200,000 in annual revenue in 2024 and used a credit card to finance various business expenses throughout the year. If you ended up paying $1,000 in interest on that card, you could deduct the $1,000 and reduce your taxable income to $199,000.
You can generally write off the full amount of interest you paid during a tax year unless your business is a tax shelter or has gross receipts over a certain threshold — $30 million for the 2024 tax year. In that case, the maximum deduction will be the sum of your business’s interest income for the year, 30% of your business’s adjustable taxable income (ATI), and any floor plan financing interest expense for the taxable year.
2. Business credit can help you lock in year-end tax-deductions
Business credit also comes into play with business tax deductions, in general, because you can deduct expenses whether you pay for them with cash or credit. Opting to finance them can be helpful when you’re short on cash, especially if you want to squeeze in deductions at the end of the year.
For example, Jenny is a business owner who wants to invest in a $5,000 digital marketing campaign to boost sales in the new year. However, she’d like to claim the $5,000 tax deduction in the current tax year and doesn’t want to pay out of pocket. To achieve all her goals, she pays for the campaign in December using a business credit card. As a result, she can claim the deduction for the current tax year, start the campaign in January, write off the interest, and spread the cost over the next three months.
This strategy may be able to help you manage your cash flow and deductions, but it’ll depend on the accounting method you use. Cash accounting allows you to deduct expenses when paid, and generally lets you prepay expenses up to 12 months in advance. The accrual method, on the other hand, requires you to claim deductions when goods or services are received — meaning prepaying wouldn’t secure an immediate deduction.
3. Cancelled debts can lead to taxable income
Business credit can also impact your taxes if one of your business debts is canceled or forgiven. Generally, the canceled amount must typically be reported as gross income on your tax return. For example, if you default on a business loan and the lender forgives 30% of the balance, that 30% is typically considered taxable income for the year.
However, there are a few exceptions. You don’t have to report debt relief as income if that debt would have resulted in a tax deduction (and you use the cash accounting method). Additionally, if you buy a piece of property and the seller reduces the amount you owe, you can treat it as a purchase price adjustment and reduce your basis in the property rather than counting it as income. Further exclusions can be found on the IRS website.
4. Dedicated business accounts streamline record-keeping
The golden rule of business accounting is to keep your business and personal finances separate. While that starts with having dedicated business bank accounts, it extends to business credit. Using a business credit line for ongoing business expenses you want to finance — and not mixing personal and business transactions — ensures cleaner records and reduces the chances of errors at tax time. That way, you don’t have to comb through pages and pages of transactions, trying to weed out personal expenses from business ones at the end of the year.
FAQs about business credit and taxes
Still have questions? Here are quick answers to common questions about business credit and taxes.
Is a business line of credit or loan considered income?
No, the funds from a business line of credit or business loan are not considered taxable income. They’re a form of debt and are classified as a liability.
Can I write off business bad debts?
Yes, you can typically write off bad debts if your business extends a loan to another party, such as a supplier, client, or distributor, and it goes unpaid.
Are business credit cards reported to the IRS?
While business credit cards are often reported to business credit reporting companies, they aren’t reported to the IRS. The IRS primarily collects information related to income and expenses for tax purposes.
Do I need receipts for business tax write-offs?
Yes, taxpayers bear the burden of proof for deductible expenses so you should keep receipts for every deduction you plan to claim. Even though a transaction may be recorded in your bank or credit account, those records don’t usually show detailed information about what was purchased.
Tip: With Lili, you can upload receipts into your online account and attach them to transactions to keep your proof organized and accessible.
Build credit and stay tax-ready with Lili
Staying on top of your small business credit and taxes starts with having the right tools, and Lili can help on both fronts. We’ve recently teamed up with business credit reporting company, Dun & Bradstreet, to empower you to take steps toward establishing business credit. After opening a Lili checking account, you can now sync your financial data with D&B Credit Insights, allowing you to potentially impact key business scores.1 As for taxes, Lili’s software can help you streamline tax preparation and filing with features such as pre-filled business tax forms, automated tax savings, and instant sorting of expenses into tax categories.
1By integrating your Lili Business Bank Account through the D&B Credit Insights banking integration feature, there may be potential for you to positively impact your Delinquency and Failure Scores. Dun & Bradstreet requires a minimum of six months of business banking transaction history to be able to potentially impact these scores.
