Be Careful When Borrowing Money From Your Business

One benefit of owning your own business is being able to borrow money from it. But it’s critical that you properly borrow the money, or you could end up with a surprise from Uncle Sam. Here’s how to prevent a business loan from potentially turning into an unexpected tax bill.

The Problem

The IRS likes to see business owners who dot all their i’s and cross all their t’s. For owners who borrow money from their business, the IRS wants to see evidence that the borrowed money is an actual loan. If the IRS selects your tax return for an audit and can’t find this evidence, it may decide to treat the money as taxable wages or dividends instead of a loan.

What You Can Do

To avoid a possible dispute with the IRS regarding loans you take from your business, consider the following:

• Document the cash withdrawal as a loan and draft a legally enforceable promissory note.
• If you’re a corporation, be sure your documentation includes the authorizing of the loan in your minutes.
• The promissory note should include interest that will be charged. Consider using the federal interest rate at a minimum.
• Record the transaction as a loan in your business’s accounting system.
• Consider strict enforcement of repayment per the terms in the promissory note.

If you've paid attention to the details, your loan should withstand IRS scrutiny. Please call if you'd like more information about borrowing money from your business.