There will be times that your business is low on funds especially if you have payroll to meet and other operating expenses that are coming due and your clients haven’t paid their invoice yet. As a business owner if you have your own personal funds you can lend money to your company especially if you are trying to hold off from getting loans from banks and etc.
The best procedures to follow in lending money to your company are:
1. Write a check from your personal account to your business.
2. In the memo section of the check noted that it is a loan.
3. Create a promissory note agreement between you and your business.
4. In that promissory note set terms, repayment schedule and include interest. This would be similar to any bank promissory agreement.
5. The interest has to be reasonable; you cannot make the interest too low because this will raise a flag with the IRS if you are ever audited. According to the IRS code section 7872 (c) there must be interest imputed to “below the market loans” which are basically between family members, employers and employees, corporations and shareholders, and etc. Therefore it is very important to make sure all I’s are dotted and the t’s are crossed.
6. To get a better interest rate to charge, you can check the IRS’s “Applicable Federal Rates (AFR)” which are posted monthly.
7. Keep all copies of the promissory note in a safe place:
a. Until the loan is paid back
b. Just in case you are audited
8. Once the promissory note is paid in full which a form 1099-INT will be mailed out by next years tax season.
9. Please note that your company’s accountant will have to send a copy of the form 1099-Int to the IRS.
10. Therefore you must file your copy of form 1099-Int with your individual income tax return.
11. The interest is considered extra income.
12. You do have a choice to either have your company pay you back in full in the current year or you can hold off receiving your loan repayment in full to the next year.
Timing is a way to know when to accelerate or postpone income depending upon if you are in a higher tax bracket or lower tax bracket. This is very important when it comes to tax planning because tax planning will help you understand this importance so you can maximize your tax benefits.
These are steps that will help you keep important documents as well as good record keeping that would be beneficial if you are ever audited. Finally, these steps will help you from commingling funds and be a preventative action from allowing courts to pierce the corporate veil of your company.