Maximum Interest Allowed on a Business Loan

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Subject Author Date Maximum Interest Allowed on a Business Loan nish 10-17-2008  Re: Maximum Interest Allowed on a Business Loan Paul Thomas, CPA 10-17-2008  Re: Maximum Interest Allowed on a Business Loan Dick Adams 10-17-2008  Re: Maximum Interest Allowed on a Business Loan Harlan Lunsford 10-26-2008  Re: Maximum Interest Allowed on a Business Loan Dick Adams 10-26-2008  Re: Maximum Interest Allowed on a Business Loan Arthur Kamlet 10-26-2008  Re: Maximum Interest Allowed on a Business Loan Dick Adams 10-26-2008
Posted by nish on October 17, 2008, 1:04 pm Please log in for more thread options >From the IRS' perspective, what is the maximum interest rate allowed on a loan from a person to a C or S Corporation? If the loan interest rate exceeds the amounts allowed under State usury laws, is this something the IRS will try to enforce? Or is the only risk of such a loan from an audit by the State tax authorities? If the loan is between friendly parties, I have a hard time understanding whether there would be any enforcement of usury laws. If you want to avoid the hassle of executing separate loan documents for any incremental loans between the two parties, can you just execute one document that extends a line of credit that is for an amount larger than the sum of the individual loans? If such a line of credit document exists and meets the various tests for being a legitimate loan document, will this do away with the need for further documentation each time a check is written from the person to the corporation? Perhaps the check memo could reference the "LOC Dated 9/9/2099"? nish -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Paul Thomas, CPA on October 17, 2008, 3:12 pm Please log in for more thread options > >From the IRS' perspective, what is the maximum interest rate allowed on a > loan from a person to a C or S Corporation? > > If the loan interest rate exceeds the amounts allowed under State usury > laws, is this something the IRS will try to enforce? Or is the only risk > of such a loan from an audit by the State tax authorities? If the loan > is between friendly parties, I have a hard time understanding whether > there would be any enforcement of usury laws. The IRS would allow deductions for interest that is obviously business related, but tey also look at the loan from the "ordinary and necessary" standards and in the case of related "friendly" parties, they'd look at reasonableness. 15 - 20% with a credit card company is one thing. 20% with a related party might be something else entirely. If banks are loaning (a big IF these days) at 8%, then a loan with a family member or business associate shouldn't be much greater than that. They'd also look at the economic substance of the loan transaction to see if there is intent to shift, defer or otherwise evade taxes. If I gave my grandchild $12,000 and then borrowed that amount from her at say, 24% interest, they'd have things to say about it. > If you want to avoid the hassle of executing separate loan documents for > any incremental loans between the two parties, can you just execute one > document that extends a line of credit that is for an amount larger than > the sum of the individual loans? If such a line of credit document > exists and meets the various tests for being a legitimate loan document, > will this do away with the need for further documentation each time a > check is written from the person to the corporation? Perhaps the check > memo could reference the "LOC Dated 9/9/2099"? -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Dick Adams on October 17, 2008, 5:50 pm Please log in for more thread options > From the IRS' perspective, what is the maximum interest > rate allowed on a loan from a person to a C or S > Corporation? > > If the loan interest rate exceeds the amounts allowed > under State usury laws, is this something the IRS will > try to enforce? Or is the only risk of such a loan > from an audit by the State tax authorities? If the > loan is between friendly parties, I have a hard time > understanding whether there would be any enforcement > of usury laws. ... The IRS looks skeptically at related party loans. So who is a related party? Answer: for openers, it includes you, your family, your nefarious relationships, your business partners, and people to whom you money outside of the Corp receiving the loan. The simple question is "Why would an economically rational person borrow at a interest rate higher than the nominal rate at which he could borrow?" So on audit, the IRS will most likely question the substance of high interest rate loans and may allocate the excessive interest as income to the Corp and as dividends to the lender. Dick -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Harlan Lunsford on October 26, 2008, 6:11 pm Please log in for more thread options Dick Adams wrote: > > The IRS looks skeptically at related party loans. So who > is a related party? Answer: for openers, it includes you, > your family, your "nefarious"!!! relationships, your business > partners, and people to whom you money outside of the > Corp receiving the loan. please elucidate as to what constitutes such. common law wife? POOSLT? POSSLT? (grin) ChEAr$, Harlan Lunsford, EA n LA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Dick Adams on October 26, 2008, 10:09 pm Please log in for more thread options > Dick Adams wrote: >> The IRS looks skeptically at related party loans. So who >> is a related party? Answer: for openers, it includes you, >> your family, your > > "nefarious"!!! > >> relationships, ... > please elucidate as to what constitutes such. > common law wife? > POOSLT? > POSSLT? > (grin) The term "nefarious" was intended to include both extra-marital affairs and co-conspirators. Common-law spouse has a legal definition. The Census Bureau term is POSSLQ (pos ul Q) or "Persons of the Opposite Sex Sharing Living Quarters". OTOH an extra-marital affair is a PSJ (Periodic Shack Job). ;) But in the end, a related party is whomever the IRS says it is - unless and until a judge says different. Dick -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted student loan interest February 5, 2007, 1:51 am student loan interest January 27, 2010, 8:53 am Deduction for Student Loan Interest... February 17, 2007, 5:17 am Second Home loan interest deduction April 15, 2006, 3:18 am student loan interest deduction January 30, 2009, 7:12 pm Student Loan Consolidation - Capitalized Interest March 12, 2007, 5:13 am How to determine gift amt for interest-free loan? 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