0

I owe $50,000 to my mother and father, who have helped me consolidate my debt over the years.

Can my business buy my debt from my parents for the full amount I owe and then forgive me from having to pay it back?

My business would incur a loss but I wouldn't have to use personal after-tax dollars to pay off my debt.

This seems like a good strategy to me. What kind of paperwork would be required and what are the potential downsides to this plan?

  • 6
    It sounds like something the IRS would take a very dim view of. – Loren Pechtel Jun 9 '12 at 0:50
  • how can a business possibly forgive debt of its own owners? it will reduce your stake in the business by an equivalent amount. You can write off receivable from outsiders but not from your own self. BTW what kind of business ownership is this e.g. partnership, company ? – Natwar Lath Jun 9 '12 at 12:18
9

When your debt is forgiven, you have to consider the amount written off as an ordinary income item (with the exclusion of the debt originated from the purchase of primary home).

If you're trying to write the debt off from your taxes - then it won't work. Even if you can expense the debt forgiveness, you will incur tax liability on your personal taxes side, and in addition you'll be out of cash in your business. So basically you'll end up paying it with after tax money, exactly the thing you're trying to avoid.

In addition, you're dealing with related persons here, which means that the loss deduction might not be allowed (depends on the actual details of the transaction), so you might actually end up paying more taxes with this scheme that just paying off the loan directly (if your business pays taxes separately from your person).

A loss on the sale or exchange of property between related persons is not deductible. This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. For the list of related persons, see Related persons next.

  • 2
    +1 In fact, wouldn't Social Security and Medicare taxes (both employee share and employer's share) also be due on the loan that is forgiven? Loan forgiveness is no different than a bonus paid to an employee, right? – Dilip Sarwate Jun 9 '12 at 2:15
  • @DilipSarwate good point. – littleadv Jun 9 '12 at 8:02
  • A minor point to clarify but the exception for debt forgiveness on primary homes is temporary and set to expire relatively soon if I remember correctly. – stoj Jun 9 '12 at 14:04

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.