Are loan payments by an LLC considered a business expense?

Question

My son is considering forming an LLC to purchase a percentage of the company he currently works for. He will own a portion of the company and receive profits commensuate with his ownership. The make this purchase possible, I am considering making a large loan to his LLC. If the LLC elects to be taxed as a corporation, are the payments of interest and principal of the loan expensed against the 'profits' he will receive from his partial ownership. Can remaining profit or a portion of the profit be retained by the LLC and taxed at a lower corporate rate? We're trying to structure this purchase in a way to minimize income tax due while the capitalization loan is being paid off. Any help will be greatly appreciated.

Answer 1

Above is correct. The principle is an investment in the company he works for. It could only be written off it the investment went bad.
You don't say what the business is. Personal service corporations do not pay at the reduced corporate rates. A personal service corporation is medical, legal, accounting, consulting etc. Before electing corporate status make sure of what taxes will apply. S-corp may be a better way to go.
I would suggest that you have a consultation with a good CPA before moving forward.

Answer 2

No. The loan will be a liability on the balance sheet of the LLC. Principal will be applied to the liability, while interest would be deducted as an expense. In my experience, LLC's are usually taxed as partnerships (or S-Corps) in which any profit is passed through to the individual's personal tax return and taxed at their marginal tax rate. Any profit will also be subject to self-employment tax to your son.

Answer 3

enable's say you are attempting this. enable's say you % to be an S-corp and proceed to artwork for corporation XXX for $a hundred and forty four,000 a 300 and sixty 5 days. for the reason which you have been already doing that artwork, the IRS could anticipate your corporation to pay you a similar $12K a month as a clever gross sales. even nonetheless you intend to restructure the type you artwork--you will desire to because of the fact in case you do a similar artwork, they'd desire to nevertheless pay you on a W-2--you have a historic previous of offering the service and how lots to procure paid. the extra advantageous variations incorporate, owing the state a cost (as much as $1000 a 300 and sixty 5 days), having to report an 1120S via 3/15, deducting valid corporation expenditures on the 1120s and not it sluggish table A (via the way, you do understand that driving to a minimum of one customer an afternoon remains called commuting and is not deductible), having to venture your self a paycheck, withhold for taxes, make well timed deposits *and* report the 940s and 941. and remember approximately to pay the SUTA and FUTA taxes. you besides mght would desire to locate some extra purchasers to teach that that may not a bogus association the place you think of you may keep funds via paying your self, say, $6000 a month and calling the the remainder of it a distribution.

Answer 4

Only the interest is a legitimate business expense. Repayment of principal is never deductible.