Business Loan Taxation

As a business owner, and to properly account for a business loan, you should be familiar the following tax issues that result from taking out a loan for your business.

 

1-A bona fide business loan should be a written document with the following information:

            Date of the loan

            Principal Amount Borrowed

            Interest Rate

            Loan Repayment Dates

            Lender's Name & Address,

            Business Borrower's Name & Address

            Collateral pledged, if any

            Amortization Schedule

 

2-Loans are not income to the borrower. Rather, a loan is either as short-term or long-term liability. Short-Term if the loan is for less than 1 year. Long-Term if the loan is for 1 year or longer.

 

3-The Amortization Schedule shows the date and amount of each required loan payment. For interest-bearing loans, each loan payment is broken down into a principal and interest portion.

 

4-Principal repayments reduce the outstanding loan balance (and are not a tax deduction).

 

5-Interest payments are a deductible business expense.

 

6-If the borrower is unable to repay the loan in full, cancellation of debt income, and gain or loss on asset disposal may result, depending on the specific facts and circumstances.

 

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
Visit us at: www.scoresouthflorida.net

 

Marketing tip of the month

#13  FREE AS A BIRD

Continuing with the so important Call to Action, here is a list of suggestions  when you want to attract customers with something for free: Get it free,

It’s free-get started,  Get this deal, Sign up for your free trial, Free 30 day trial, Try it now, free, Start saving today. And if you want to limit your offer try these: Offer expires X, Limited time offer, For the first X people only, Order now and receive a free gift!

 

Martin Kahn, SCORE Counselor

Visit us at: www.scoresouthflorida.net

Cybersecurity 101

Here are a few pointers:

Choosing passwords:

     Using more letters, numbers and symbols while they may help, are not infallible.  

     Five or six words may be of more help by increasing the random possibilities.

Using a password manager:

     These pick random very long passwords that you do not need to remember. 

     They require a very long password that you better not forget

Public Wi Fi:

     Anyone can easedrop and intercept a conversation

     Avoid these if possible

     Use only a trusted virtual private network (VPN)

Charging your phone:

     Doing this in public places is not a good idea (airports, etc)

     Venerable to side channel attacks.

     If you must, turn the phone off while charging

Decoys can help:

     Download multiple similar apps (ie. Bank apps) making it harder to find which is real.

     Create multiple “fake files” (ie. Tax returns, customer records) for the same reason

Technologists are continually looking for alternatives, so stay on top of this subject.

 

How is your business protected?

 

Steve Koenig, SCORE Counselor

Visit us at: www:scoresouthflorida.net

 

 

S Corporation Shareholder-Employee Business Use of A Home

 

Shareholder (owners) of an S Corporation who render services to the corporation's trade or business are deemed to be an employee (and not an independent contractor) of the corporation.

 

Because the shareholder is deemed an employee, they are required by law to be paid a reasonable amount of compensation (wages) services rendered which is reportable on their W-2 each year.

 

The general rule is that employee un-reimbursed business expenses (business expenses that an employee incurs while conducting business that are not reimbursed by the corporation) are deductible on Form 2106. These expenses are then transferred to Schedule A, Itemized Deductions, and included are line #21. Further, these expenses are subject to a 2% of Adjusted Gross Limit threshold limit before they can potentially become deductible, assuming the taxpayer does itemize deductions and not take the standard deduction.

 

Employee business expenses (including the business use of a home) by a S Corporation Shareholders officers, or regular employees have a special requirement in order for the expenses to be deductible.

 

The tax law requires a written corporation resolution that requires the taxpayer to incur expense as may be necessary or required, and that they would not be reimbursed by the corporation. Thus, a written corporate resolution or policy in place requiring a shareholder, officer or employee to assume specific expenses is required in case of an IRS Audit.

 

Without the corporate resolution, the IRS in an audit will most deny the deduction as a voluntary payment of corporate expenses, and consider them to be capital contributions or loans to the corporation.

 

NOTE: Even if there is a written corporation resolution, specifically the shareholder MUST follow the law requiring they receive reasonable compensation wages for services rendered to the corporation.

 

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
Visit us at: www.scoresouthflorida.net

 

Home Office Deduction For Self-Employed

 

Self Employed taxpayers file Schedule C (Form 1040) to report their business income and expenses.

The home office deduction, if allowed, is taken on Line 30 of Schedule C.

The IRS allows taxpayers two options for taking the Home Office Deduction, the Simplified Method or the Regular Method, whether they own or rent the home.

Under the Simplified Method, the taxpayer is allowed a home office deduction of $5 per square foot up to a maximum of 300 square feet in lieu of determining actual expenses. Actual expenses are not considered or taken into account. Thus, the total potential deduction is $1,500.00.

If the taxpayer uses the Simplified Method for the home office deduction, they do not File Form 8829 Expenses For Business Use of Your Home.

Under the Regular Method, the taxpayer take into account various actual home office expenses and then takes the business use percentage of the home office to calculate the potential home office deduction. Thus, more record-keeping is required to track the expenses.

If the taxpayer uses the Regular Method, they must file Form 8829 Expenses For Business Use of Your Home, to calculate the allowable home office deduction, which then transfers to Schedule C, Line 30.

Typical home office expenses include: mortgage interest, real estate taxes, homeowners insurance, utilities, maintenance and repairs, and depreciation.

Under either method you need to figure the percentage of your home devoted to your business activities. Therefore you will need both the total square footage of the entire home and the square footage devoted to the business activity.

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:

1-Regular AND Exclusive Use-you must regularly use part of your home exclusively for conducting business, and

2-Principal Place of Business-your home must be the principal place where you conduce business.

IRS Publication 587 from the IRS provides information for Business Use of Your Home.

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
Visit us at: www.scoresouthflorida.net

Marketing Tip of the Month

#12  CALLS TO ACTION

Here are some great calls to action to use in your sales literature. Choose the ones YOU like, then, if possible, change them from time to time to find out the BEST ones for your business: Find out more, Visit now, Get on our mailing list, Join the club now, Take the next step, How to get started, Start here, How it works, Learn more.

Martin Kahn, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

Partner's Business Use of A Home

 

Partners report expenses for the business use of a home as unreimbursed partnership expenses on Part II,  Line #28, column (h), Schedule E, Form 1040.

Partners do not use Form 8829, Expenses For Business Use Of A Home, for a partner's expenses.

See a detailed discussion of Partner's Unreimbursed Expenses, article.

 

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
Visit us at: www.scoresouthflorida.net