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I have a client that purchased a note receivable at a

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discount through his single member...
I have a client that purchased a note receivable at a discount through his single member LLC. How do you record the discount on the books? Is the income taxed as ordinary income or as a capital gain? The client paid $450,000 for a note that was valued at $550,000. The client collected $850,000 at the end of note. The $300,000 is interest income but how do you record the $100,000 discount on the note?
Submitted: 8 months ago.Category: Tax
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Answered in 23 minutes by:
9/14/2017
Tax Professional: Lev, Tax Advisor replied 8 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,838
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The note is recorded as an investment asset.
If the client is in business purchasing and selling notes - that will be inventory.

If that just a single note - it will be just an asset.

It is recorded based on purchase price $450,000 regardless of its face value.

The interest collected $300,000 will reported as such and will be be taxed as ordinary income.

When the note is disposed - sold, paid off, etc - the gain on disposition is classified as capital gain - short or long term depending how long the client held that note.

The gain will be calculated as a difference between disposition payments (excluding interest) and original purchase price (basis)

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