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.
To receive our free newsletter, contact us here.
Subscribe our YouTube Channel for more updates.
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
GROCO.com is a proud sponsor of The American Dreams Show.
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.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Clinton’s Using Careful Strategies to Avoid Tax They Support Have you ever wondered what wealthy democrats do when tax laws they support and vote for come back to apply to them? Although people typically associate being wealthy with republicans, there are plenty of rich democrats in the nations’ capitol as well. So just what do…
We have discussed the federal government’s efforts to track down tax-evaders many times before, but the IRS isn’t the only tax agency looking to crack down on those who don’t pay their fair share of taxes. The California Franchise Tax Board is in the middle of a five-and-a-half-year effort to automatically find and identify noncompliant…
The IRS is Not a Bully You can poke a bully in the nose. Palo Alto, CA. July 4, 2014 – This is the Fourth installment of “The IRS is Not a Bully” series, identifying taxpayer concerns and the difficult position in which Congress puts the IRS. Namely, applying ever increasing pressure to operate in…
New Jersey Dems Looking to Tax the Rich Even More The rich are already taxed enough, right? Although many would disagree with this statement, unfortunately there are others who think that no matter how much they take from them, the rich can’t ever be taxed too much. To that end, democratic lawmakers in New Jersey…