What happens to taxes if I make a loan to my business?

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Q. We are starting a business in New Jersey. We expect to start operating after March 15, 2022. It’s an LLC and we have a good attorney who is writing and reading our contracts. I want to loan the company the startup funds — $250,000 — for which we have saved for this purpose. However, when the LLC starts paying us back, I don’t want to pay taxes on the loaned amount, just the interest. How is this done and what about incidentals that you need to buy that are under $20?
— Owner

A. Congrats on the startup of your new business.

It’s important to understand what happens in situations like this.

There is no need to treat the monies being used to start the business as loans, unless you plan on charging interest to the business, which is not necessarily the right move for tax purposes, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

He said you will pick it up as income and the business will get a deduction for the interest.

For federal purposes, that will wash, he said, but not necessarily for New Jersey state purposes, Karu said.

New Jersey is a gross income state. Accordingly, partnership losses can only offset partnership gains, he said.

Additionally, there should be a note evidencing the loan.

“The LLC would issue a 1099-INT for the amount paid to the lender,” he said. “If the members are not contributing pro-rata into the business and the intent is to repay the loan, this is a good option.”

If funds are being deposited on a pro-rata basis, the alternative is to deposit the funds as capital contributions, Karu said. Then you would just take a distribution of the profits as needed.

With regard to expenses, Karu said you should keep receipts.

“You don’t need the paper copies. Electronic is fine,” he said. “Then reimburse whoever paid those expenses from the business and record the expenses. While many items may be de minimis, they will add up.”

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This story was originally published on Feb. 14, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.