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Background: I've just formed an LLC for a...

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20 May 2013

Background: I've just formed an LLC for a business I am starting (I'm in California). I'm going to be running the business by myself for the first 6-12 months. I'm going to be getting a loan from my parents for $30k-$50k that will help me stay afloat during this time period. What I’ll Use Money For: I’ll basically use this money for living expenses, etc. and some of it in the business. But basically it will keep me personally afloat so that I can work on the business. Tax Question: Should I have my parent loan this money to me directly (me, the person) or should I have them loan it to my business, the LLC? In both those scenarios would I need to pay taxes on the dollar amount they loan me? Is there any scenario in which I wouldn’t have to pay taxes on that loan amount? Or do I pay taxes no matter what? If it’s a ‘gift’ and not a loan is it still taxed? How would I pay the least amount of taxes possible? ☺
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20 May 2013

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Tax Professional's response
21 May 2013
Lev
Lev
Retired
Tax Question: Should I have my parent loan this money to me directly (me, the person) or should I have them loan it to my business, the LLC? Generally - that would not matter if the money are loaned directly to the business or you p[er4sonally take a loan and use funds for business. Because part of the loan will be used for personal expenses - you might want to divide the loan into two loans - personal and business. You will not be able to deduct any of your personal expenses. However business expenses (including any interest you will pay on the business loan will be deductible. In both those scenarios would I need to pay taxes on the dollar amount they loan me? The loan is not your taxable income and will not be reported on your tax return - regardless if that is a loan to the LLC or the loan to you personally. The money will be considered as a loan as long as they are expected to be paid back. If it’s a ‘gift’ and not a loan is it still taxed? As a recipient of the gift - the person does not need to claim it as income in the US. Regardless of the value. Please see for reference IRS publication 525 page 34 (left column)- http://www.irs.gov/pub/irs-pdf/p525.pdf Gifts and inheritances. Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you. However the donor might need to file a gift tax return when the total gift value is above $14,000 (for 2013). There will not be any gift taxes unless the lifetime limit (which is currently $5,250,000) is reached. Let me know if you need any help with tax related issues.
21 May 2013
Customer reply
21 May 2013

Thanks LEV! I appreciate the response and good answer. Cheers, -John XXXXX

21 May 2013
Tax Professional's response
21 May 2013
Lev
Lev
Thank you for warm words! I am here to help you better understand tax related issues. Be sure to ask for clarification as needed.
Lev
Lev
Retired
Avg. question only $32
Taxes, Immigration, Labor Relations
21 May 2013
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