Do I get taxed on money I invested in my business and then paid back?

Question

According to someone I know who does accounting, they said that the money I invested in my business this year is not taxable. They said that since I loaned the money to the business as start up capital, it's not taxed if the business shows it as a loan repayment. So basically all the money I collected from the business last year would make my yearly income = $0 The business also had a net loss. So am I to understand that the IRS is not going to raise a huge red flag that I am claiming to have made no money in 2006? They said if I consider the money compensation then it would be taxed and the business would still owe me the start up cash. If it's shown as a debt repayment, it's not taxable.

Answer 1

I agree with Judy except there are good and bad accountants just like there are good and bad people that work for H&R Block. She is right in that you don't want to walk into a general H&R Block and have a 1st year preparer try to figure out your taxes, but they have very skilled people at their Premium stores that do hundreds of corporation returns each year.

Now, you mention business, but you do not mention if it is a sole-prietorship, a corporation, or a partnership. Each is taxed differently. If it is a sole-prietorship, you and the business are one. You can't "loan" the business any money. Your money is the business's money and vice-versa. If, at the end of the year, the business had a net loss, that loss goes directly onto your tax return and goes against any other income you have. If you had no other income, or if it was less than the business loss, you will have what is known as a Net Operation Loss (NOL) which you will either carry back (and do an amended return and get an immediate refund) or carry forward to lower you tax bill in a future year. If the business is a corporation and your provided start-up capial, any return on that capital is not a taxable event until the return exceeds your basis. Going into how to calculate your basis gets tricky if the business took recourse or non-recourse loans or other things, so I won't get into it here....but a simple return of investment is not taxable. They money you invest was already taxed when you originally earned it....why do you want to pay tax on it again? This is true regardless how much time passed by from when it was put into the business and when it came out. However, if it was truely a "loan", then there must be interest paid out and that interest is taxable. Please see someone good at taxes and don't try to do this on your own. You may be pleasently surprised at how little taxes you will owe until the business is truely profitable.

Answer 2

Return of capital isn't taxable income. But you'd be wise to have an accountant (NOT H&R Block) do your taxes for the year to ensure they're done right.