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Lending Money to Your Corporation
Category: BusinessStarting a business takes a substantial amount of money and effort. However, there
are right and wrong ways to go about lending money to your corporation.
If you want
to lend money to your corporation, you properly document the transaction. If you
give money to your business to purchase inventory and the company defaults on the
loan, you may be qualified to write off the loan as a business bad debt versus and
investment loss. A business bad debt can be offset against other ordinary income
such as W-2 income, interest and dividend income. A business bad debt can 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 loan money to your business, you should be paid back with interest. The
interest is taxable to you, and deductible to the 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:
by a specific date or a certain amount must be paid on demand.
interest.
profits, decision making, and other factors.
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.
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