Discussion:Loan to start a business
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Discussion Forum Index --> Tax Questions --> Loan to start a business
| 15 August 2007 | |
| How does a sole proprietor recover money loaned to start his business? He used his personal funds to buy office equipment, furniture, etc. | |
TheTinCook (talk|edits) said: | 15 August 2007 |
| Do you mean cost recovery?
It all depends on when and on what he spent his money on. You recover the cost on tangible assets like furniture and office buildings by depreciation. Intangible assets get amortized under Sec. 197. Startup and organization costs can be partially expensed and amortized under Sec. 195. Then there is the incredible Sec. 179. Then there is the issue of a sole proprietor "loaning" money to his sole proprietorship. | |
| 16 August 2007 | |
| I think what he wants to do is recover the money he loaned to the business in the first year to pay the operating expenses since he did not have enough income to cover those expenses. But, I told him that he deducted all the expenses and claimed his loss for the first year, which he was able to use against a large capital gain. | |
TheTinCook (talk|edits) said: | 16 August 2007 |
| Is there any reason he can't take draw from capital? If it's a bonafide loan you can always repay it, but for a Sole Prop? | |
| 16 August 2007 | |
| There was never any formal loan agreement, only the money taken from personal funds to cover operating expenses and to purchase equipment. | |
TheTinCook (talk|edits) said: | 16 August 2007 |
| Definatly not a loan then. The money was a contribution of capital. He could take a draw of capital in the form of cash or property if he wants. | |
| August 16, 2007 | |
| ? It's got nuttin' to do with nuttin'. No income putting it in, no expense taking it out. It's about what he can afford to take out. He writes a check if it won't bounce. Really nothing to this...what's your real question? | |
| 16 August 2007 | |
| The question is, did he HAVE to take all those expenses in the first year? If not, why would he want to offset max 15% taxable income with ordinary loss? | |
| 16 August 2007 | |
| This is a common misunderstanding among newly minted sole proprietors. I tell sole proprietor clients that YOU ARE THE BUSINESS AND THE BUSINESS IS YOU. All the money and assets in an SP'ship belong to the owner without any special procedures to pay or repay them. If you take money out, it doesn't really matter what you call it - draw, loan repayment, capital withdrawal, salary, overtime, paid vacation. (Every vacation I take is a paid vacation; I can call it whatever I want. Maybe it's sick pay, I don't know!)Paying the owner S/P'ter doesn't affect taxes, doesn't affect profit or loss, doesn't affect anything. Except, like JR1 points out, don't write a check to yourself that bounces. That will affect something! | |
| 16 August 2007 | |
| I did not do his first couple of years in business, he had a CPA do those returns. He did offset capital gains with his business loss for the first year. His spouse also had income for that year and he was able to offset the loss against her income. | |
| 16 August 2007 | |
| You don't really "recover" money you put into a new business, you deduct the expenses paid with your own money, thus your "recovery" was the tax savings of the expenses.
When the business makes enough money to pay you back, that usually comes from profit - taxable. | |
| 16 August 2007 | |
| For IRS' purposes, a Sch C does not exist as a separate entity at all. It's just another one of your activities to be reported on a specific schedule, just like rental goes on Sch E. | |
| 3 January 2008 | |
| What if the money came from a consulting gig that the client did under another business? I told her that the money is still hers and that her Schedule Cs would show a loss from the consulting business and a gain to the store, offsetting any additional tax questions. But there are a number of complicating circumstances- for example, the consulting gig was paid by a foreign government for a development job in another foreign country. Would that fact change anything? | |
| 3 January 2008 | |
| This thread started as a discussion about a "loan" to a sole proprietorship. So, assuming Zain, that you are still talking about money put into a sole proprietorship, the source of the money is not really relevant. There really is no such thing as a loan to a proprietorship, anymore than there is a loan from my left pocket to my right pocket. Money invested in a proprietorship is owner's capital. It comes out as a reduction of capital when the own takes a draw, hopefully from profits. The investment in Company A from Company B, both run as proprietorships, is not income to A and not a deduction to B. | |
| 21 January 2009 | |
| (SPAM post deleted, and user blocked from further posts to TaxAlmanac. While this may seem harsh, this user created his account today and his first post was purely SPAM. No warnings were deemed necessary as he had not contributed anything to any prior discussions indicating that he was even a tax professional.) | |
| 21 January 2009 | |
| That was not nearly as harsh as the e-mail I sent to him. | |
| January 21, 2009 | |
| Thank you, Kevin. I'm just wondering, though, when do you work? | |
| 21 January 2009 | |
| LOL, that is certainly an issue, Natalie. I don't do write-up work and only have a few clients who I do W-2's for, so January is very slow. | |
| January 21, 2009 | |
| Well, lucky for us you and Trillium are team-tagging on all of this clean up stuff. | |
| 21 January 2009 | |
| Remember, a sole prop. is not a separate business. He made a capital contribution, and it's so listed on the "separate" books.
He will find that he has unlimited capital to contribute to his business when he or his employee runs over a minister in pursuit of the Lord's work, or worse yet, a nun, or even worse, a lawyer. Heh. | |
| 21 January 2009 | |
| you mean 'even better...a lawyer' don't you?
with the new administration, it IS time to make the world a better place. What could be better than running over a lawyer? Girl Scout Cookies? Close, I'll admit. | |
| 21 January 2009 | |
| I believe that my last post needs clarification: do not run over the Girl Scout cookies. Eat them. | |
| 21 January 2009 | |
| Alas, why am I helping to contribute to one of the great myths of society? Lawyers stop more suits than they ever dream of filing. | |
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