Let’s face it—money and family can be a recipe for drama juicier than your favorite reality TV show. But when it comes to borrowing cash for your business, you don't want Uncle Sam as your surprise guest star. So, how do you know if that financial help from dear Aunt Sally is a loan or a gift? Grab your popcorn; we’re about to dive into this tantalizing tale.
We’ve all been there. Your business hits a rough patch, and who better to turn to than the family? After all, they love you, right? But here's the kicker: whether that money is a loan or a gift can make a world of difference come tax time. Spoiler alert—it can also save you a lot of family feuds and IRS headaches.
So, let’s decode this mystery. If someone has loaned you money, it should be as clear as a plot twist in a soap opera. That means having a written agreement detailing when you'll pay it back, how much you'll pay, and the interest rate. No interest? No problem—unless the IRS is involved. Even if Aunt Sally says “Pay me back whenever you can,” without paperwork, it's not a loan. It's a gift wrapped in confusion and potential tax issues.
Here's a juicy tidbit from our files at Calculated Moves. We had a client who claimed they had a loan from a family member. No payments were made, no interest was charged, and the money sat on the books gathering dust. When asked, the answer was, “Oh, he just told us to pay him back when we could.” Cue the dramatic music! The IRS won’t buy that storyline. Without a proper loan document, you're wading into murky waters where personal and business finances dangerously intermingle.
Now, here’s where things get spicy. If your "loan" is over $10,000 and doesn’t charge interest, the IRS will impute interest. Translation: they'll pretend you paid interest even if you didn't, letting your business deduct it while the lender counts it as income. Confused? You’re not alone. This is why having a documented loan agreement is crucial.
Want to keep everyone happy (and the IRS off your back)? Draft a loan agreement. Think of it as setting the script for a smooth-running show. Include terms like repayment schedules and interest rates. Even a modest 5% or 6% interest shows appreciation and keeps things above board. For complex agreements, consult an attorney. Simple promissory notes can save relationships and reduce risks. And for the basic stuff, hey, even ChatGPT can help!
At Calculated Moves, we understand that family businesses, reinvented careers, and modern entrepreneurs need to make more money, pay less in taxes, and outsource time-sucking tasks. We're your CPA firm and small business growth strategist, ready to navigate the ebbs and flows of business with you. Imagine smoother sailing and tranquil financial waters.
Got better things to do than crunch numbers? Like, I don’t know, living your life and doing what you love? Strategic planning and financial preparedness are our jam. Let us handle the accounting headaches so you can focus on making great decisions and boosting profits.
Ready for financial clarity and peace of mind? Dive deeper into our blog and let Calculated Moves guide you through the twists and turns of your entrepreneurial journey. Because navigating the business world shouldn’t be a solo act.
Stay tuned, and let’s keep those family ties strong and your business thriving!
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Donna Bordeaux, CPA with Calculated Moves
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.