How the 20% Small Business Deduction Impacts Your Loans (And Why It Matters Now)

4 min read

Have you ever thought that something as simple as a tax deduction could make all the difference in getting the loan your business needs?

Well, the 20% Small Business Deduction—a key piece of tax relief for small businesses—is exactly that game-changer. If you're planning on securing financing or looking for better loan terms, understanding this deduction and what might happen if it goes away is crucial. And heads up—it could be gone by the end of 2025.

Disclaimer: This article is for informational purposes only and should not be considered tax advice. Always consult a certified tax professional for guidance tailored to your business needs.

What Is the 20% Small Business Deduction?

Let’s rewind to 2017 when the Tax Cuts and Jobs Act (TCJA) was passed. The 20% Small Business Deduction—officially called Section 199A—was created to help businesses like yours keep more of what you earn. If you own a pass-through entity (like a sole proprietorship, partnership, S corporation, or certain trusts), this deduction allows you to deduct up to 20% of your qualified business income (QBI).

Think of it as a little "thank you" from Uncle Sam for being the backbone of the economy. It effectively reduces your taxable income, which means more cash in your business’s bank account.

Why Has This Been a Game Changer?

Let’s be real—lowering your tax bill isn’t just nice, it’s essential. Here’s how this deduction has helped small businesses thrive:

More Money to Grow: When you’re keeping 20% more of your earnings, that’s cash you can reinvest—maybe in upgrading equipment, hiring that extra staff member, or even just saving for a rainy day.
Stability During Tough Times: Especially during the rollercoaster of the pandemic, having a little extra cash flow thanks to a lower tax bill was a lifesaver for many businesses.

How Does This Affect You When It Comes to Lending?

Here’s where things get interesting. You might not automatically connect "tax deduction" with "loan approval," but they’re totally linked. Here’s why:

More Cash Flow Means Better Loan Terms: When you’re paying less in taxes, your net income looks better. And what do lenders love to see? Good cash flow! It’s a major factor in deciding whether you get approved for a loan—and what terms you get. A higher cash flow could mean lower interest rates and more favorable repayment terms.
Debt Service Coverage Ratio (DSCR): This is a fancy term lenders use to see if you’re making enough money to cover your debt payments. With a 20% deduction, your DSCR improves because you have more available income after taxes. A higher DSCR can mean the difference between getting approved for financing and getting that dreaded "no" (or an offer with less-than-great terms).
Lower Default Risk: Let’s face it, when you’ve got more cash on hand, you’re less likely to miss a loan payment. This makes you less risky to lenders, and a lower risk often leads to better opportunities for your business—like larger loans or reduced collateral requirements.

But Here’s the Catch…

The 20% Small Business Deduction is set to expire in 2025. Yep, that’s right—unless Congress decides to extend it (which, fingers crossed, they might!), this deduction could be off the table soon. If it disappears, here’s how it could impact you:

Higher Taxes: If the deduction goes, you’ll likely be paying more to the IRS—meaning less cash for day-to-day operations or growth.
Lower Borrowing Power: Your net income could take a hit, which means your financials might not look as strong to lenders. This could make it harder to qualify for loans or lead to higher interest rates. Not fun.
Increased Financial Pressure: Without that extra boost from a tax break, staying afloat during challenging times could get tougher, especially if margins are tight.

How to Prepare for What’s Ahead

So, what can you do now to stay ahead of the curve? Here are a few steps to help you prepare in case this deduction says goodbye:

Talk to Your Accountant: I know, taxes can be confusing, but a good accountant is like having your very own financial GPS. They can help you navigate through these changes and find other ways to minimize your tax burden if the deduction goes away.
Consider Financing While Things Are Good: If you’re thinking about expanding or investing in new equipment, now might be a good time to apply for that loan. Your current financials, boosted by the 20% deduction, could make you a more attractive candidate to lenders.
Maximize the Deduction While It’s Here: If possible, take advantage of the deduction now. You could consider making investments that qualify or adjusting your income strategy to make the most of this benefit before it’s gone.
Diversify Your Financing Options: Build relationships with different lenders or consider alternative funding sources. The more options you have, the better equipped you’ll be to handle whatever comes next.

The Bottom Line

The 20% Small Business Deduction has offered significant relief for small business owners, allowing them to keep more of their hard-earned profits and use it to grow. As we approach 2025, the possibility of this deduction expiring is a reminder to be proactive and thoughtful about your financial strategy. A little planning now can go a long way in protecting your business from future uncertainties.

If you're thinking about how this change might impact your borrowing power or overall financial health, don’t wait until it’s too late! At Njord Capital Group, we specialize in helping small businesses secure the financing they need to grow and succeed—even in times of uncertainty.

Need Help with Other Funding Solutions?

At Njord Capital Group, our priority is understanding your unique situation and recommending the best solutions for your business. Whether you’re exploring short-term, long-term, or other financing options to improve cash flow, our goal is to provide real, practical solutions to get you back on track. If you’d like to explore how these strategies can fit into your financial plan, don’t hesitate to reach out at info@njordcapitalgroup.com or visit us at www.njordcapitalgroup.com to explore our other financing products.