Lending Money to Your Corporation
Lending Money to Your Corporation
By Alan L. Olsen, CPA, MBA (tax)
Greenstein, Rogoff, Olsen & Co. LLP
Starting a business takes a substantial amount of money and effort. There is a correct process to go through if you want to lend money to a corporation. First, you must properly document the transaction. If you give money to your business to purchase inventory and the company defaults on the loan, you may qualify to write off the loan as a business bad debt versus an investment loss. A business bad debt can be offset against other ordinary income such as W-2 income, interest and dividend income. This type of debt can also result in creating a net operating loss on your individual return when you don’t have enough income to offset the business loss.
A non-business bad debt is treated as a capital loss. A capital loss will only offset capital gains. If you realize net capital loss, you can then use the loss to offset up to $3,000 in ordinary income.
When you lend money to your corporation, the interest that you will be paid back with will be deductible to the business, but taxable to you.
Requirements to loan money to your business:
If you are considering lending money to your corporation, there are four requirements that you must meet to qualify your debt for a loan instead of equity:
Your debt should be documented as a written obligation that needs to be paid back by a specific date or a certain amount must be paid on demand.
The debt cannot be converted into stocks for the corporation or any other equity interest.
The corporation must determine interest rates and payment deadlines based upon corporation profits, decision making, and other factors.
The lender must be an eligible shareholder of the corporation, individual, estate, trust or tax-exempt entity.
If a bank or individual will not make a loan directly your corporation, you can use a “back-to-back” loan. Back-to-back loans are an option for lenders of corporations if the lender wants personal guarantees in loaning money. In a back-to-back loan, the lender will make a loan to the shareholders who will then make a loan to the corporation. When a back-to-back loan is used, tax results are far better than if a corporate loan is made.
We hope you found this article about “Lending Money to Your Corporation” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
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The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
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See Lynn Thomas’ Recent Interview with Alan Olsen: https://youtu.be/0VFOWFl3wqk Lynn Thomas has been helping clients unlock success, one idea at a time by executing tailored client presentations that deliver extraordinary client experiences. Her firm specializes in creating and implementing plans based on new tax laws and the ever-changing market research. Lynn connects with her clients…
See Dr. Lee Hood’s recent interview with Alan Olsen: https://youtu.be/60DDZ0MJ8QE Dr. Lee M. Hood is best known for his development of technologies which have enabled the advancement of predictive, preventative medicine. Dr Hood’s journey began at a young age, when he was an assistant professor of molecular immunology at California Institute of Technology in 1973.…
See Ali’s recent interview with Alan Olsen on Youtube: https://www.youtube.com/watch?v=MJyKKqTCaBM Ali Nasser is a serial entrepreneur who has been helping business owners for nearly twenty years. He understands the legacy dilemma and financial freedom that many business owners face when it comes to their life experience, which is why he has developed a powerful and…
Transcript Alan Olsen Welcome to American Dreams. I’m here today with Lynn Thomas. Lynn, welcome to today’s show. Lynn Thomas Thank you for having me on. I’m delighted to be here. Alan Olsen So Lynn, for the listeners, you have a remarkable career. I think you started out with Arthur Andersen. Lynn Thomas Yes, I…