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I start an S Corp in January and borrow 1 million dollars. By the end of the year I manage to make 1 million dollars and repay the loan pocketing zero dollars. How much tax do I have to pay this year?

Key information from the comments:

Q: if you used the $1 million you made to repay the loan, what happened to the $1 million you got from the loan itself? You still have that money (or assets you bought with it), right?

A: I spent the money on salaries. No assets accumulated. Next year I may have to borrow money again

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  • "pocketing zero dollars" -- if you used the $1 million you made to repay the loan, what happened to the $1 million you got from the loan itself? You still have that money (or assets you bought with it), right?
    – nanoman
    Apr 7 at 23:33
  • I spent the money on salaries. No assets accumulated. Next year I may have to borrow money again.
    – Charles L
    Apr 7 at 23:39
  • That is important info to include. So you had revenue (sales) of $1 million, expenses (salaries) of $1 million, and profit of zero. The loan is mostly irrelevant.
    – nanoman
    Apr 7 at 23:45
  • If you made 0 net profit how did you pay back the $1M loan?
    – D Stanley
    Apr 8 at 13:01
  • borrowed $1M + receivables $1M - salaries $1M - loan payback $1M = $0
    – Charles L
    Apr 8 at 15:03
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Paying back a loan is not an expense - only the interest would be an expense. The rest would be profit that is taxable.

If you used the $1M profit to pay salaries, and paid back the $1M from the cash that remained, then you'd have zero net income and pay no taxes.

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  • See OP comment clarifying that there were actual expenses (salaries) of $1 million in addition to the loan payments.
    – nanoman
    Apr 7 at 23:47
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Quoting from this Bankrate article:

Are business loan payments tax deductible?

In short, business loan payments aren’t tax deductible. When a business loan is received by a company, it’s not included as taxable income. In turn, when that loan is repaid, you are not able to deduct loan principal payments. You are simply paying back money you borrowed, not income spent.

That doesn’t mean that there aren’t deductions you can still make. Interest paid or accrued on your business loan are tax deductible in most cases.

So no, you can't deduct payments that go towards paying off the principal of the loan, but you can usually deduct the interest payments. If you have an S-corp and are worried about this, talk to a tax accountant.

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