How Is Zakat Calculated If You Have a Personal Loan Used for Business?
Question
What’s the ruling on your zakat if you have a loan on your name. example your friend lent you 20,000 dollars and your using it for your business, if my understanding is right your total zakat is only due on the amount after subtracting loan from your money
Answer
Alhamdulillah, wassalatu wassalamu ala rasulillah, wa ala alihi wa sahbihi ajmain.
1. The Shari Context
Zakat is an obligation on wealth that a Muslim fully owns and possesses once it reaches the nisab and remains in their possession for one lunar year. The purpose of zakat is to purify wealth and assist those in need.
Allah says:
“Take from their wealth a charity by which you purify them and cause them increase.”
Surat al Tawbah 9:103
However, when a person carries debts or financial liabilities, the jurists examine whether that debt reduces the wealth that is truly owned and therefore subject to zakat.
2. Scholarly Discussion
The scholars discussed whether debts reduce the zakatable amount, and they differed on how they should be treated.
Because of these differences, the contemporary scholars adopt a balanced approach. Debts that are immediately due or expected to be paid soon may be deducted from zakatable wealth, while long term debts that are paid gradually may only reduce the amount due in the current year.
3. Application to the Question
In your example, your friend lent you 20,000 dollars and you are using it in your business.
Several scenarios may apply.
If that 20,000 dollars is still in your possession as cash or business assets, and it is a loan you must repay, many scholars allow you to deduct the debt when calculating your zakatable wealth. In this case, zakat would only be due on the amount that remains after subtracting the debt.
For example, if your total zakatable assets are 50,000 dollars, and you owe 20,000 dollars, you may calculate zakat on 30,000 dollars according to the view that debts reduce zakatable wealth.
However, if the money has already been invested in business inventory or goods, then zakat is still due on the value of the business assets, although the debt may still be considered when calculating your overall liability depending on the scholarly view followed.
It is also important to note that the person who lent the money may also have zakat obligations on that loaned amount if it is considered a recoverable debt.
4. Relevant Usul Principle
الحكم يدور مع علته وجودا وعدما
A ruling revolves around its effective cause, existing when it exists and ending when it ends
The obligation of zakat is tied to complete ownership of zakatable wealth. When a debt reduces a person’s actual ownership because the money must be repaid, the effective cause of zakat is reduced. For this reason, many jurists allow deducting debts from the zakatable amount before calculating zakat.
Final Ruling
If you owe 20,000 dollars as a loan, many scholars allow you to deduct that amount from your zakatable wealth. Zakat would then be calculated on the remaining amount of wealth that you truly possess. However, if the funds are invested in business assets, zakat is generally due on the value of those assets, while the debt may still be considered depending on the scholarly opinion followed.
And Allah knows best.