Forums: Discussions for entrepreneurs and small business.

I am funding the groundwork for a new future business by using my own after-tax dollars.  I know that my money will be put to good use; that I will reap the benefits of the new business by owning it myself; and that I will be able to write off the expenses of the new business against future taxes.

However, I think I will still be "losing money" this way.  For example, if I have to foot the bill for a capital expenditure, that expense can only be depreciated rather than written off immediately.  And I just don't think that depreciation is going to fully compensate me for having put up after-tax dollars for this business.

I was wondering whether I could structur my personal gifts to my business as loans, with interest due to me at such time that the business starts making an income. This way I would get 100% return on my capital investment.  I would have to pay taxes on the interest, of course, but I could presumably set the interest rate at a level that would make it palatable for me.  (Currently I am paying 9.99% on credit card debt that I created to finance the business, and I doubt I could find a bank that would lend to me at less than say 12%, so I think a decent percentage repayment could be justified using "arms-length" rules.)

Is it possible to lend money to my business in this way?  And would it be financially beneficial for me to do so?

-------------------------

Pat,

You left out a couple of details that may change my answers, i.e., what type of capital purchase? what kind of legal entity have you set up?

You can expense up to $500,000 of certain fixed asset purchases placed in service during the year. It is called a Section 179 deduction.

If your business is set up as a sole proprietorship or a single member LLC, then loaning your business money and charging the business interest does not yield any tax benefits. Whatever deduction you get for interest expense is offset by a like amount that you need to claim as interest income.

I hope this helps.

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga