This study aimed to (1) estimate the prevalence of sarcopenic obesity (SO) and sarcopenia, (2) examine their associations with cognitive impairment (CI), and (3) identify other factors associated with CI among older adults with Type 2 Diabetes Mellitus (T2DM). A cross-sectional study was conducted in 2016 at a community diabetes clinic in Taiwan. A total of 235 adults aged ≥75 years with T2D were enrolled. Body composition was measured using multi-frequency bioelectrical impedance analysis, and cognitive function was assessed using the Chinese version of the Mini-Mental State Examination. Multivariable logistic regression was used to identify factors associated with CI. Participants had a mean age of 80.7 ± 4.3 years, and 57.9% were women. The prevalence of SO and sarcopenia was 35.0% and 42.6%, respectively. Participants with SO had significantly higher odds of CI than those without SO (adjusted OR = 2.64, p = 0.005). Older age, female sex, and lower education were also independently associated with CI. These findings suggest that SO is an important risk factor for cognitive impairment in older adults with T2D. Routine screening and interventions targeting sarcopenic obesity may help to reduce the risk of cognitive decline in this population.