Tax Implications of Using an SBA 7(a) Loan to Buy a Business
Back to Learning Center SBA loans have made it easier for entrepreneurs to buy an existing business. Due to its competitive financing terms, interest rate, lower down payment requirements, and flexible use of funds, it has become a gold standard among entrepreneurs. Interestingly, there’s a critical consideration which is often overlooked are the tax complications of using an SBA 7(a) loan. It’s important to understand the tax side of using an SBA 7(a) loan. It can either help you save thousands each year or end up costing you more than you expected. The difference between a tax-optimized deal and a missed opportunity can be reduced by onboarding experienced SBA loan advisors and tax professionals. They help you structure a deal that brings in tax benefits. This is exactly what Pioneer Capital Advisory and Midwest CPA deliver to their clients. In this guide we’ll walk you through the key tax implications of using an SBA 7(a) loan, and show you how smart planning can make all the difference. What is an SBA 7(a) Loan and Why Buyers Prefer It An SBA 7(a) loan is often preferred due to its attractive financing terms, lower down payments — typically requiring at least 10% equity injection as mandated by the SBA. Some lenders may require a higher amount such as 15%, depending on the borrower’s profile or deal structure. The loan also offers longer repayment schedules and competitive interest rates. As SBA 7(a) loans are backed by the U.S. Small Business Administration, lenders often approve loan requests easily and offer flexibility in deal structure. However, such flexibility often leads to the need for proper tax planning and requires expert navigation before moving your application. Note: Not every business qualifies. SBA rules prohibit loans to certain ineligible business types, such as real estate holding companies, businesses engaged in marijuana-related products, passive income models, or any business with unresolved federal debt defaults. It’s critical to confirm your target acquisition meets SBA eligibility before committing to a deal. Working with an experienced SBA loan broker streamlines the process through their expertise in loan approval mechanics and understanding of how the deal structure impacts your tax position. Such expertise comes in handy when SBA loan help means—the difference between a profitable acquisition and a tax nightmare. Tax Deductions Available to Buyers Using an SBA Loan As an entrepreneur, you enjoy several tax benefits using an SBA 7(a) loan for business purchase. Before diving into the tax advantages, it’s important to know that SBA 7(a) funds must be used for approved business purposes. These include acquiring tangible and intangible assets, working capital, and certain refinancing — but the funds cannot be used for passive investments, speculative ventures, or buying assets not essential to the business operations. Your advisor should walk you through acceptable use of proceeds. Let’s have a look on them: Interest Expense Deductibility: The interest on your financed amount of SBA loan is usually deductible as a business expense. Resultantly, you get the benefit of annual tax savings of thousands of dollars if the amount of loan is in millions. Amortization of Intangible Assets: If your deal includes intangible assets like goodwill, customer lists, or non-compete agreements, they all can be amortized over 15 years. Therefore, you get substantial annual deductions as long-term tax relief. Depreciation of Physical Assets: Tangible assets—equipment, furniture, and vehicles’ depreciation can qualify for IRS rules allowing immediate deductions rather than spreading costs over several years. The key is proper preparation in every aspect—areas where inexperienced SBA loan advisors often lack the ability. Structuring the Deal for Optimal Tax Benefit The deal structure has a direct impact on your tax situation for years to come. Small business acquisitions are mostly structured as asset purchases but some may be structured as stock purchases. Asset Purchase vs. Stock Purchase Asset purchase includes buying assets and assuming select liabilities. This structure often offers higher depreciation and amortization benefits, making it more tax efficient. Stock purchases—where the buyer acquires the seller’s ownership interest—may be simpler in some scenarios but typically provide fewer tax deductions. It’s important to note that the SBA generally prefers asset purchase structures and may require additional justification and lender documentation for stock purchases to be approved. How It Affects Taxes Your tax obligations vary based on the way you allocate the purchase price across assets (tangible and intangible), and goodwill directly impacts the depreciation schedule and tax deductions. Experienced SBA loan advisors can help you structure the allocation to maximize immediate deductions. It’s also important to understand how SBA views ownership and control. Any individual who owns 20% or more of the business will typically be required to personally guarantee the loan. SBA also reviews affiliations — if you or your investors have ownership in other businesses, that could impact loan eligibility and size determination. Your advisor should help identify and disclose these details early in the application process. Tax Responsibilities You Should Prepare For While SBA loans offer tax benefits, they also bring in some obligations for buyers to take care of: Purchase Price Allocation Requirements: The IRS requires both buyers and sellers to agree on how the price will be allocated using Form 8594. Incorrect allocation may lead to penalties and stricter audits. State and Local Tax Variations: Depending on your business location—taxes are applicable. For multi-state business, what works in California may not work the same in case of Texas. Estimated Quarterly Payments: If you’re a new business owner, it’s important to keep in mind that you’ll need to make estimated tax payments. Skipping this step could lead to some penalties that compound quarterly. Loan Covenant Compliance: SBA loans come with ongoing financial reporting and covenant compliance requirements. If your tax strategy and loan compliance are not well-aligned, it could create issues with the lender, such as triggering review flags or corrective actions — even if your business is financially strong. Proactive coordination between your CPA and lender is key to staying in full compliance. How Pioneer Capital Advisory
