Family member business loans and taxes?

Question

My mother is considering making a small business start up loan to me. Can she use any tax deductions for this? The loan would be $10K
Thanks!

Answer 1

Deductions??

The interest would income.

Only if your business fails and you do not pay her back (and assuming the loan is properly documented) could she take a "deduction".

Answer 2

Wayne Z is correct. Your mother needs to:
Clearly document that the money is actually a loan, with or without interest. The documentation should also include payment terms and the collateral for the loan, if any

She should also write a memo to herself establishing that the borrower was solvent at the time of the loan. This proves she had a reasonable expectation of repayment and were not actually making a gift

If she doesn't set an interest rate, the IRS, in its family-friendly way, will do it for you. And since that interest would be considered income for the lender, the IRS will happily tax her on the interest payments she never received. Essentially, the IRS, eager to raise revenue, has decided that for a loan to be a loan, interest must be paid, and if interest is being paid, someone is making taxable income.

Avoid Imputed Interest
Imputed interest and all the crazy imputed income and gift tax problems generally do not apply when loans from someone to the borrower total no more than $10,000. You may want to play it safe and take a loan for $9500.

Now for the possible deduction: if you (the borrower) cannot pay back the loan, shewants to be able to claim a "nonbusiness bad-debt deduction." This is treated as a short-term capital loss on her Schedule D. She can claim the deduction simply by showing that the loan is uncollectible. She should make a written demand for repayment, when that action goes unrewarded, she should write herrself another memo for the tax file documenting that she tried and failed to collect your money, and preferably include financial information showing the borrower is insolvent.

This sounds ugly, but borrowing money always is. If you want your mom to be able to claim a deduction in case you can't pay her back, you need to give her this information.

Answer 3

The answer is Yes provided she is doing this as a business. If she is just supplying you capital then No. There's some good advice on this (small business) site below where you might find a helpful article - I did!

Hope this helps.

Roy

Answer 4

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