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Hi my name is XXXXX XXXXX I will be helping you today with your tax question. This is not cancelled debt and not earned income therefore you do not need to book this as income. All you need to do is remove the liability from the balance sheet for the loan and book the money as part of your basis in the company. It is money contributed by owner which will increase the investment you have in the business. Now if this was over $12,000 and his parents are still alive they need to file a gift tax return and their estate will be taxed on this amount if the overall value of their estate is taxable based on tax levels at their time of death. However you do not need to pay any taxes on a gift or inheritance regardless of the amount
Thank you for getting back to me. I am not sure if they already filed this since it was 9 years ago. Do I need to find this out or can I just focus on my end?
So I need to prepare a journal entry for this, to remove it from the liability side and make this an asset. Is there a standard account used for this?
You should mention it to them as right now it is considered a "gift" and not inheritance as they are still alive. The easiest way to do this is to simply credit the loan account payable and then debit the owner basis; or you can simply cut them a check for the money of the loan, book is as a repayment of loan, have them make a check payable to your husband this way they can do the gift tax return this year, and then he can just record it as a basis contribution; on this end it is a few more bookkeeping entries for you but allows them to properly do their gift tax return in the current year.
what if I find out that they already filed a return? Do I need to do anything special in that case?
No if they filed their gift tax return then you can just book it how I told you, $0 out the loan account and increase the owners basis. If will keep your accounting equation balanced as you will be decreasing a liability and increasing stockholders equity in the single entry.
okay that makes sense
so this all stays on the balance sheet and not the P & L. Therefore no additional corporate tax due?
Correct, it is not taxable income, it is the same as if you put the additional money into the business out of your own pocket because that is technically what is happening, your husband was gifted money from his parents and contributed it to the business. Not taxable under any circumstance.
Got it. That was very helpful. Thank you so much. This helps a lot
You are very welcome! Glad I can help, let me know if you have any further questions.
Thank you. Will do