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My company (a California LLC taxed as a partnership) has been

paying monthly interest and principal...
My company (a California LLC taxed as a partnership) has been paying monthly interest and principal to me on a loan made since January 2009. The interest is deductable to the company and income to me personally.

We expect the business to make extra profit this year which we would like to have paid back entirely as principal on the loan to reduce its transfer of taxable income to my 1040 personal return at the end of the year.

In December 2009, can I refinance the loan I made to my company to include a heafty 'downpayment' at the time of refinance and what will be the taxable income event that might occur as a result - would I have to take the downpayment as personal income on my 1040 or is it a non-taxable event to me personally? How does this event affect the company if at all?

Thanks in advance!
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Answered in 5 minutes by:
7/2/2009
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Verified
Hello answer seeker,

I am not exactly clear on what it is you are proposing that you want to do.

I understand that your company currently has a loan on the books payable to you, and the company plans to pay you back that loan in full sometime this year. Correct?

And then at the end of the year, what exactly is it that you want to do? Give the company another loan?
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Customer reply replied 8 years ago
Correct we established a loan back to me Jan 09. It's been making payments like normal. I would like to refinance the loan at the end of the year using the extra profit on the books as a downpayment on a new loan but not payoff the loan - just make a new loan, new terms, etc.

I'm seeking to understand how that affects the company and me personally as far as taxable income to both.

Make sense?
Hello again answer seeker,

Regardless of how your structure a loan to the company, when the company pays you back any principal amount on that loan, that repayment is not taxable income to you. At the same time it is not a tax deduction for the company. The only amount that is taxable is any interest that the company pays you on the loan, and the company may also deduct that interest as an expense.

You said that because you expect the company to make some extra profit this year you have planned to have them pay you back for most or all of the current loan in order to reduce the transfer of taxable income to your 1040. However, this will not be the case. Paying off a loan is not an expense, and does not reduce the profit that your company made for the year. The only portion that is an expense is interest that is paid.

If your company has a profit of $100,000 and they pay $80,000 to you as a repayment of principal on a loan, the company still reports a profit of $100,000 -- not $20,000. The partners will still be taxed on the $100,000 profit that was made. If they use the money to pay back your loan then the partners will not receive as much of a distribution as they may otherwise have received, but it does not reduce the partners taxable income.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you again answer seeker.

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Customer reply replied 8 years ago
So if I understand it correctly, using your example, the $100K "profit" in the company comes through as either $100K income (as parners and with no refi - loan stays the same) to my 1040 (normal parnership distribution),

OR

as $20K income distribution (remaining "profit" after paying the big chunk) + $80K "income" to my 1040 because I was paid back that as principal on the loan?

Isn't that double taxing the $80K since my loan to the company was originally made with funds I had already personally paid taxes on?
Hello again answer seeker,

Using the same example as I gave earlier, if your company makes a profit of $100,000, then that will be reported as profit to the partners and will flow through to the partners personal tax returns as taxable income. It is the entire $100,000 profit that is being reported to you as taxable income -- not $20,000 profit and $80,000 loan proceeds.

When the company pays off a loan, that is not an expense for the company, and the payoff does not reduce the company's income. It strictly reduces the company's cash flow.

When your company takes out a loan from you or from anyone, it is put on the books as a debit to cash (which is an asset account) and a credit to notes payable (which is a liability account). When the loan is repaid, those entries are reversed. But your income and expense accounts are not affected. Any income or loss that you had for the year remains at the same level as it was prior to repayment of the loan.

Taking the example a little futher -- let's say you gave your company a loan for $100,000 and they spent all of that money on advertising. Advertising is an expense which is deductible for the company in the year that incurred the expense. So they take the $100,000 as a deduction from any taxable income they had for that year. Just because the money came from a loan does not mean that it is not considered an expense for the company.

The same is true for income. Just because the income was used to pay off a loan does not mean that the income is no longer there.

You are not being double taxed, because the $100,000 they report is from the income -- it will be split equally among all the partners, regardless of how much they pay back to you on your loan. So let's say there are 5 partners in the LLC and the company had profit of $100,000, and they pay you back $80,000 on your loan. The $80,000 is not reported to you as income. The $100,000 is reported as income and is divided by the 5 partners who report taxable income of $20,000 each.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you answer seeker.

Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Verified
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