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Featured Biz Question
I'm borrowing a chunk of money from a family member to buy a business that's been in operation for 18 years successfully. I know I'll pay her back no problem. The thing is, this loan (which I'll draw up a promissory note for) will be paid back with interest. This interest is tax-deductible, right? Will she have to declare this on her income tax as income? She's taking out a home equity loan just to get me the money and is only charging me the same interest as she's paying. Should I not claim it on my business' income tax return? What do you suggest?
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Answer from our Guest Expert Peter Soh of AdviseInc.com
Loans of any kind are not tax deductible because they're not considered expenses. But you're right, the interest on these loans is tax deductible.
Because your loan is a family one, the related-party tax rules kick-in. The related-party rules for expenses are "cash-basis." This means that expenses can only be deducted when paid, or expenses can be deducted when the lender includes the interest amount as income. These rules apply, except for below market loans, which are another ball of wax. Since you say your family member will charge you the same interest as the home equity loan, then the loan shouldn't be below market and you don't have to worry about this.
As far as where to claim the deduction. It depends. Will the business pay back the loan or will you? If the business pays it, then it should deduct the loan and be the party named in the loan documents. If you pay for it, then you should claim it on your individual tax return.
I'd also like to mention this situation definitely requires a tax professional since you're purchasing a business, and other tax rules come into play that interrelate with this transaction.
Hope this helps, if not, send me an email
Peter Soh of AdviseInc.com
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About the Expert
Peter C. Soh
Owner
of AdviseInc.com
Peter is a savvy certified public accountant dedicated to helping startups.
He is a small business advisor for the U.S. Small Business Administration
and teaches "How to Start Your Business" seminars. more
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