Loan, Investment or what???

[chadcrc]

Question... If I owned a company (Sole Prop) and someone gave me money to buy materials for a job, then when the job was finished I paid that person back more than what they gave me, how would I account for this transaction? Would I consider this a short term loan and then the amount over what they gave me would be interest expense? Since this person is an individual, would I provide a 1099 to him/her for the full amount paid over the year?

Now if I flip this around and I am the ordinary person giving the money to the company (Sole Prop) expecting a profit when paid back, Would I consider this short term capital gains or what? How would I report this money that I made?

Thanks

[Evan]

Hmm, what type of business is this? Are you essentially saying, I'd be giving you $1,000 -- and you'd be doing whatever with it, than after so long I'd be getting $1,200 back?

[OldJack]

Not sure I understand who is who in your example but this is still the answer:

As a sole proprietor any of his money the sole proprietor put in his own business (investment) or take out of the business (return of investment and/or profit) has no effect on the sole proprietor's taxes. The sole proprietor is taxed on the profit of the business without such transactions from the owner considered. All profit is ordinary income on your 1040, other than the sale of assets that might qualify as capital gains. Assets that might produce capital gains would be such as sale of real estate, equipment, or the sale of the business itself. In that case capital gain is only that portion of a gain that is sold for more than the original purchase price of the asset.

If someone else (other than the sole proprietor) loans the sole proprietor money, it would be treated as a loan or advance from the other person. And the additional paid the other person would be ordinary income to the other person regardless if it was classified as interest (1099-INT), commission, profit, etc (1099-Misc). Depending upon the agreement and the joint use of cash, this might be considered a joint venture or in other words a partnership for the job requiring a partnership tax return.

[chadcrc]

The flip side is someone not related to the company, not myself. I am coming at this from my side -the business owner(1st part), and then from the outside person not related to the company but just a person loaning money to the business to make a profit.(2nd part) This is a painting business. An outside person loans the money to the sole prop to buy the materials (Paint) then when the job is done and he gets paid, he pays back the investor with interest. Evan, my answer to your question above is yes.

My flipside question is as an outside person loaning the sole prop money, Would I consider the profit from the loan as ordinary income or is this some kind of investment capital gain?

I assume as the business owner I would provide the investor a 1099 for the total amount paid back...

[OldJack]

Not sure I understand who is who in your example but this is still the answer:

As a sole proprietor any of his money the sole proprietor put in his own business (investment) or take out of the business (return of investment and/or profit) has no effect on the sole proprietor's taxes. The sole proprietor is taxed on the profit of the business without such transactions from the owner considered. All profit is ordinary income on your 1040, other than the sale of assets that might qualify as capital gains. Assets that might produce capital gains would be such as sale of real estate, equipment, or the sale of the business itself. In that case capital gain is only that portion of a gain that is sold for more than the original purchase price of the asset.

If someone else (other than the sole proprietor) loans the sole proprietor money, it would be treated as a loan or advance (not income to the sole proprietor) from the other person. And the additional paid the other person would be ordinary income to the other person (and expense deduction to the sole proprietor) regardless if it was classified as interest (1099-INT), commission, profit, etc (1099-Misc). Depending upon the agreement and the joint use of cash, this might be considered a joint venture or in other words a partnership for the job requiring a partnership tax return.

[Evan]

Originally Posted by chadcrc

The flip side is someone not related to the company, not myself. I am coming at this from my side -the business owner(1st part), and then from the outside person not related to the company but just a person loaning money to the business to make a profit.(2nd part) This is a painting business. An outside person loans the money to the sole prop to buy the materials (Paint) then when the job is done and he gets paid, he pays back the investor with interest. Evan, my answer to your question above is yes.

My flipside question is as an outside person loaning the sole prop money, Would I consider the profit from the loan as ordinary income or is this some kind of investment capital gain?

I assume as the business owner I would provide the investor a 1099 for the total amount paid back...

If they're giving you money, that is a personal liability, you owe them that back. If you're going to pay them back the loan, I'd h

What you're essentially doing seems to be running yourself like an actual business entity, but its not that simple. Nothing regarding the loan has anything to do with your taxes.

Now, let me throw this situation out here, and let's see if this is how you're envisioning this (or if it is similar). I'm going to loan you $1,000, to buy paint, etc. for someone. I'm going to be getting $200 in addition to my loan back. On you're side, that money is going to be spent buying supplies (lets say it costs $1000), and you're going to be paid by a customer (let's say they pay $2000).

For tax purposes, under that situation, you're income is $2,000; expenses are $1,200, for a net profit of $800 which you'd be paying taxes on. To account for that $200 interest, your best bet seems to be issuing him a 1099-MISC. While he's not doing anything active with your venture, he is making that money which is deductible for you and taxable for him. I don't see (maybe Jack does) why you'd issue another 1099 form.

[OldJack]

Originally Posted by Evan

To account for that $200 interest, your best bet seems to be issuing him a 1099-MISC. While he's not doing anything active with your venture, he is making that money which is deductible for you and taxable for him. I don't see (maybe Jack does) why you'd issue another 1099 form.

If it is interest, as the example indicates and I would agree, it would be reported on a 1099-INT rather than 1099-MISC. The investor would not have to pay self-employment tax from the amount on a 1099-INT.

[KAYLINDA]

Old Jack..would the $200.00 be posted to your books as interest expense? Is there a limit to the percent of interest you can post in one month? Thanks!

Sorry...I made a change in my wording and somehow got this in twice...

[KAYLINDA]

Old Jack..would the $200.00 be posted to your books as interest expense? Is there a limit to the percent of interest you can charge and therefore post to your books for one loan?

[OldJack]

Originally Posted by KAYLINDA

Old Jack..would the $200.00 be posted to your books as interest expense? Is there a limit to the percent of interest you can charge and therefore post to your books for one loan?

I was a little quick to agree that the example was interest.

It would be Interest if the 2 parties had agreed that it was a loan with that interest rate and they actually documented it as a loan. If it was interest on a loan the only limits on the amount would be dictated by the state usury laws that limits the amount of interest one can charge for a loan. Bookkeeping would have no limits and the amount would be posted as interest expense therefore requiring a 1099-INT as any amount $10 or more requires reporting to IRS.

If it is not a documented loan you would have to get agreement from both parties as to just what it is meant to be. Joint venture, commission, subcontractor, loan, etc?

Truth is you should not enter into an arrangement with someone like this without a document that spells out what the agreement is for both parties. Without such agreements you are asking for a lawsuit as most such investors aren't that bright and don't think the same as you.