Lending Vs. Investing In Your Business

It may sound like a silly question but it’s quite serious. Are you taking a paycheck? “Of course,” most of you will say. Others will say, “Occasionally.” Some work on just drawing cash when they need it. Some take nothing now but will someday.

Further, I imagine every small business owner invests or lends some money into their business be it cash, through credit cards or even borrowed money. Even those that say they did not invest or lend any cash, if challenged, admit to dipping their hands into their pockets for gas, supplies, business lunches, etc., never getting repaid for these things. After years, it may add up to many thousands of dollars in incidental investing or lending.

Here is the thing your accountant forgot to tell you about: If you infused some cash into your business, say $50,000, you are entitled to classify it as a loan, not an investment. Especially if you expect to get it back, which you probably do, you are entitled to be repaid which is not a taxable event. The businessman who loaned $50,000 can withdraw $50,000 without taking taxes out, saving a total of about 15% which is $7500. This is a sizable expense or a meaningful savings.

I recommend strongly that you create a paper trail, including a note to you from the company, and record paybacks as they happen. Add interest so it appears to be a legitimate lending relationship. This is important because if the service claims it’s an investment rather than a loan, you lose the tax-free opportunity and it becomes a taxable event. Thus, document the lending even if it was years ago. Do not back date just record the event and date when executed.

This principle also covers immediate family, children and spouse, and if you lent you can have it repaid to any of your immediate family members and declare it a payback of a loan thus non-taxable. I have to ask the question, has your accountant discussed this with you? If not, why? Ask him, listen carefully to his answer, then get a new accountant.