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Subject Author Date
income from private company loan matt.roos 03-17-2007
Posted by matt.roos on March 17, 2007, 5:54 pm
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 Hi, All. I'm wondering how I should treat the income I made
from a loan I made to a friend's company. Namely short-term
versus long-term gain.

I made a $10k loan on 3/13/06. The terms called for
repayment of the principal plus $3k within 3 months. Each
month beyond that an additional $2150 would be added. Big
interest, big risk. Anyway, the company was not able to
pay me for a long time except for a $5k payment 4 months
after the loan was made. Since then we have come to an
agreement and I have "forgiven" the company much of the debt.
We agreed on them simply paying me a total of $15k ($10k
principal plus $5k interest). Here is how things have
panned out:

3/13/06: $10k loan made to company
6/17/06: $5k payment made to me (count as all principal?)
3/10/07: $5k payment made to me (count as all principal?)
3/19/07: $5k payment made to me (count as all long-term
interest?). This payment hasn't really been made yet but
hopefully it's coming soon.

How should I compute the 2007 taxes on this? What IRS pubs
might help? I declared nothing for 2006 taxes although I'm
curious as to whether I could have declared a $5k loss
since it was looking like I might not ever receive a
payment after the $5k on 6/17/06.

Thanks!
Matt

Posted by Ernie Klein on March 18, 2007, 2:18 am
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 matt.roos@gmail.com wrote:

> Hi, All. I'm wondering how I should treat the income I made
> from a loan I made to a friend's company. Namely short-term
> versus long-term gain.

Interest on a loan is just that - interest. Short/long term
applies to capital gains which a loan isn't.

> I made a $10k loan on 3/13/06. The terms called for
> repayment of the principal plus $3k within 3 months. Each
> month beyond that an additional $2150 would be added. Big
> interest, big risk.

And possibly big trouble! You didn't say what state you are
in or even if you are in the US. Assuming that you are, I
hope you are aware of the usury laws that make it illegal
for private parties to charge higher interest than a maximum
interest rate amount set by the state. For example in
California 10% is the maximum while in Colorado the usury
rate is 45%. Your 3K in 3 months for a 10K loan is 120%
rate. I don't know of any state where that is legal and the
penalties can be high (depending on the state).

I know that isn't a tax answer but I thought I should make
you aware.

--
-Ernie-

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Posted by Phoebe Roberts, EA on March 19, 2007, 2:23 am
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matt.roos@gmail.com wrote:

> I made a $10k loan on 3/13/06. The terms called for
> repayment of the principal plus $3k within 3 months.

So about 104% annual interest. Since that's an illegal
interest rate in every state with a usury statute, your
"friend" can probably have the rate reduced to the statutory
maximum (or in some states, have the whole debt eliminated)
just for asking. Oh, and RICO might mean that your efforts
to collect debt with an interest rate more than twice the
statutory maximum might constitute a felony.

> 3/13/06: $10k loan made to company
> 6/17/06: $5k payment made to me (count as all principal?)
> 3/10/07: $5k payment made to me (count as all principal?)
> 3/19/07: $5k payment made to me

You're still at 56% interest.

IMHO, you calculate payments as interest first, calculated
on the then-present terms of the agreement. So a good chunk
of the first payment is interest (I come up with $3,130).
Assuming the remainder of the payments are made in 2007,
you'd have an additional $1,870 of interest income in 2007.

Worst case scenario, you've got even more interest income,
and a bad debt deduction, which is likely the position the
IRS would take, were you to be audited.

Phoebe :)

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by matt.roos on March 20, 2007, 1:28 am
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> matt.r...@gmail.com wrote:

>> I made a $10k loan on 3/13/06. The terms called for
>> repayment of the principal plus $3k within 3 months.

> So about 104% annual interest. Since that's an illegal
> interest rate in every state with a usury statute, your
> "friend" can probably have the rate reduced to the statutory
> maximum (or in some states, have the whole debt eliminated)
> just for asking. Oh, and RICO might mean that your efforts
> to collect debt with an interest rate more than twice the
> statutory maximum might constitute a felony.

>> 3/13/06: $10k loan made to company
>> 6/17/06: $5k payment made to me (count as all principal?)
>> 3/10/07: $5k payment made to me (count as all principal?)
>> 3/19/07: $5k payment made to me

> You're still at 56% interest.
>
> IMHO, you calculate payments as interest first, calculated
> on the then-present terms of the agreement. So a good chunk
> of the first payment is interest (I come up with $3,130).
> Assuming the remainder of the payments are made in 2007,
> you'd have an additional $1,870 of interest income in 2007.
>
> Worst case scenario, you've got even more interest income,
> and a bad debt deduction, which is likely the position the
> IRS would take, were you to be audited.

Thanks for the info from you and Ernie! Although I should
perhaps be worried about it, at the moment I just find it
humorous. My friend is an MBA and CFO of his (small 3-man)
company. He was the one that offered the terms. I guess he
missed a few classes in school! I, on the other hand, can
compute instantaneous rates based on annual rates (math
adept) but know little of finance laws.

Much obliged,
Matt

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

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