What are the tax implications of lending to my own LLC?

Question

Well, as I mentioned before, I'm buying rental property under the name of my LLC (California). I used cash for the purchases, but the initial investment I made in the company was not enough to cover all my needs (I decided to purchase different properties than initially planned, so the initial budget was not enough).

I want to infuse additional money into the company, but instead of owner's capital - I want it to be a loan repaid to me.

I know that for a corporation I would have tax benefits in this case because I would be getting money back from a corporation which could be expensed and reduce the tax liability.

But in the case of LLC - is there any benefit in doing so? Or maybe it will actually harm me?

Answer 1

It looks like you'd just be charging yourself interest and paying yourself back, because it's a pass-through entity, as I'm sure you know. (This assumes you're the only member of the LLC.)

It all depends on how much money you want inside the protective cover of the LLC, and for how long. It doesn't seem to make much difference how you get the cash in or out, or how complicated or easy you make it for yourself.

Answer 2

It'll be just like any other loan you make, on your end, and receive, on your LLC's end. You pay taxes on the interest received, and your LLC can deduct the interest paid.

Do make sure you set it up properly, however:

If you want to loan money to your business, you should have your attorney draw up paperwork to define the terms of the loan, including repayment and consequences for non-repayment of the loan. It should be clear that the loan is a binding obligation on the part of the company. As a recent Tax Court case notes, the absence of such paperwork negates the loan. For tax purposes, the loan is an "arms length" transaction, being treated like any other debt.

From: http://biztaxlaw.about.com/od/financingyourstartup/f/investinbusiness.htm