How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience:  Former IRS Revenue Agent
72280797
Type Your Tax Question Here...
Dr. Fiona Chen is online now
A new question is answered every 9 seconds

I'm starting a business in Sacramento, California and was

Customer Question

I'm starting a business in Sacramento, California and was wondering if I had to pay any gift tax if my sister offered to "pay" for some of the business start up like construction out of her own pocket without getting any equity. Could this be a loophole to avoid "gift tax" if she is just "purchasing" for my business, and if it works, would the business purchases be tax deductible.
Submitted: 7 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 7 months ago.

Hello! My name is***** to JustAnswer. I'm reviewing your question now, and will post back with your reply momentarily.

Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

Gift tax is paid by the donor and not by the receiver.

"if my sister offered to "pay" for some of the business start up like construction out of her own pocket without getting any equity."

It is her help for you to start your business.

In your book, you can deduct expenses. You book cash and loan from sister. Or because she is going to help you, the money you get is yours, you can book cash versus your own equity account. Then later, deduct cash to pay the deductible construction cost.

No matter where you get the money, your business can deduct the expenses.

Let your sister worry about the tax and reporting consequence of the gift. This is not a loophole. Families help each other all the times.

Please feel free to follow up.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 7 months ago.
I completely understand that family help family all the time, but the question here is whether my sister can avoid paying taxes because the "business purchases" doesn't necessarily mean it's a loan or gift. For instance, she could buy home renovation with her own money and it would just be her personal expense.Here's a made up scenario, let's say I gave her a large amount of cash without paying the gift tax and I want the cash back to invest into my own business, she would either withdraw all of the money out of her account and give me back the cash, or she could write a check to the general contractor that's doing work for my business.Just want to see if there is a theoretical loophole if her purchases can be personal purchases rather than "gift/loan"
Customer: replied 7 months ago.
Or can she invest the money into the business and then give me the equity for free?
Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

What type of tax do you think your sister is avoiding, let's be specific. Are you thinking gift tax or income tax deduction?

What type of loophole are we referring?

I thought that she was spending money for you to do your own business use. How is this arrangement relating back to her?

Regards,

Fiona

Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

The gift tax exemption amount for the federal government now is 5.45M. I don't think your sister is giving you that much money. Also, she may or may not need to file the gift tax return. Please consult the links below.

https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

If you have business expense, you can deduct them. If you have personal expenses, you cannot deduct it, no matter where the money comes.

Please feel free to follow up.

Regards,

Fiona

Customer: replied 7 months ago.
I left a large amount of cash with her and she has been using some of the cash, now we are trying to see if there are any other alternative loopholes for her to pay me back.1) She can withdraw the large amount of money from her bank account and discreetly hand it to me without a problem,(this option might be a problem with anybody withdrawing 6 figures from their account)2) Trying to find a way she can just write a check towards my business start up expenses without it being considered "gift tax", and if she wrote a check and became an investor. We'd have to find a way for her to give up her equity to me for free. Unless there is absolutely no loopholes to avoid this gift tax, just thought I'd check first before proceeding with option 1.
Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

"Or can she invest the money into the business and then give me the equity for free?"

This is not a good idea. Shareholder and percentage of ownership are the most important thing for a company. This portion will need to be maintained as stable as possible. Any share change is an important event for the company.

Regards,

Fiona

Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

You don't need any loopholes for her to return you the money. Loan return is not a taxable event unless there is interest involved.

She can just write you a check to return the money to you. She does not have to withdraw casah.

There is no gift tax issue. She is returning money to you. It is not gift to start with.

Even if this is gift, there is no gift tax until the amount is more than $5,450,000.

Regards,

Fiona

Customer: replied 7 months ago.
Business ownership is not the problem I am trying to address.I am 100% fully funding my own business, but some of the money is stuck with my sister and she's trying to get it back to me either by withdrawing it, or writing the checks to my business expense.
Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

She can write to you a check personally. There is not a tax event at all.

Regards,

Fiona

Customer: replied 7 months ago.
I thought the maximum gift is 14,000 a year and any over will be taxed. $5,450,000 is a lifetime number.I loaned her the cash without any interest rate. It only qualifies as a loan only if i charged her interest which i didn't
Customer: replied 7 months ago.
There is no documentation of the loan from me to her and that would imply that I gifted her over the yearly 14,000 limit.
Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

1) For over a certain amount a year, you file a gift tax return which is an information return and without tax consequence. Say if one gifts another 6M in one year, there is gift tax consequence this year.

2) You both don't need to prove it is loan. There is also no interest loan.

She only needs to write you a check. Not all the loan needs to have documentation.

Regards,

Fiona

Customer: replied 7 months ago.
The reason why I am concerned is because I read this article about issues with interest-free loans
http://www.marketwatch.com/story/how-to-lend-money-to-a-relative-without-getting-whacked-by-the-irs-2015-05-12But if what you said is true, then I'm going to have her wire the money over to my business account and that should be it.
Expert:  Dr. Fiona Chen replied 7 months ago.

Dear Customer,

I read the article and don't know how to remark. There are writers writing articles to earn money.

However, have your sister wire the money into your personal account. Then, from your personal account, you send the money to the business account. This part is important.

Keep the business account only for business income and expenses coming in and out. Use personal bank account for person money in and out.

Please feel free to follow up.

Regards,

Fiona

Related Tax Questions