I just started my first contracting business, and wanted to be able to find a (legal) way to keep the money within the LLC but still pay down my student loan debts. Basically I'd really like to use as much of my side income as possible for knocking down the student loans that my wife and I racked up, and ideally I'd want to reserve as much tax-free dollars for that as possible.

If there is a way to accomplish this, how? If not, are there other options I have overlooked?

This question looks similar, but I created an LLC not a C-Corp.

Additional context:

The company is a multi-member LLC.
Are there any legal vehicles for getting student loan debt to be paid with some kind of pre-tax dollars?

Or for example, can you create a tuition assistance program within your company and pay yourself out of that for the purposes of student loan money.

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    Here is a small taste of why you'd need to consult a lawyer: sheehan.com/publications/good-company-newsletter/… TLDR: state laws differ from federal law, single-owner LLCs are special cases by the IRS and how they are handled in the case of a marriage is complicated, disregarded entity vs partnership varies by federal and state...without an expert you are going to get yourself in trouble, almost guaranteed. – BrianH Feb 27 '15 at 20:45
  • @BrianDHall I'm fully on board with a laywer, but this isn't a single-owner LLC. I have a business partner that isn't my wife. – avgvstvs Feb 28 '15 at 0:31
  • That's good, and sorry for mis-understanding that part :) I read the "you and your wife" and misunderstood! – BrianH Feb 28 '15 at 1:40

Before filing your first business tax return, you will need to choose a taxation method, either corporation or partnership. If you choose a partnership, then it's moot - your business income flows through to your personal taxes via form K-1. Also, regardless of your taxation method, you should consult a legal expert, since having your business pay off your personal debt would almost always be counted as income to you, and may cause you to lose the personal liability protections provided by the LLC (aka "piercing the corporate veil"). Having a single-member LLC with no employees, you have to be very careful how you manage the finances of the business. Any commingling of personal and business could jeopardize your protections.

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    I'm not a lawyer or accountant, so I don't know the ins and outs of all the tax code. But I would think that a single-member LLC loaning money to himself would raise a red flag somewhere. – Kent A. Feb 26 '15 at 17:24
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    And it does sound like I need to consult a lawyer, regardless of anything said here. – avgvstvs Feb 26 '15 at 18:36
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    @mwp below-market interest rate is a rate below the IRS-mandated. It can definitely be below the rate of the loan being refinanced. What the OP wants, however, is for this to be pre-tax money, which is in no way possible obviously. – littleadv Feb 27 '15 at 3:01
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    @mwp I think you miss the point of the business providing the loan. Student loan debt generally carries over bankruptcy. Other types of debts can be forgiven. The OP can default to his business then his business would have to eat the cost. – maple_shaft Feb 27 '15 at 17:25
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    @maple_shaft except that in this case the corporate veil will be very likely pierced, and quickly. – littleadv Feb 27 '15 at 17:56

I'm not certain I understand what you're trying to do, but it sounds like you're trying to create a business expense for paying off your personal debt.

If so - you cannot do that. It will constitute a tax fraud, and if you have additional partners in the LLC other than you and your spouse - it may also become an embezzlement issue.

Re your edits:

Or for example, can you create a tuition assistance program within your company and pay yourself out of that for the purposes of student loan money.

Explicitly forbidden. Tuition assistance program cannot pay more than 5% of its benefits to owners. See IRS pub 15-B.

You would think that if there was a way to just incorporate and make your debts pre-tax - everyone would be doing it, wouldn't you?

  • I updated the question with some additional context. Does that change your response? – avgvstvs Feb 26 '15 at 18:32
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    No, it doesn't. Nothing will be "after tax". Why would it be? In the end - its your personal debt, whatever "assistance" your LLC is giving to you is considered income. – littleadv Feb 27 '15 at 2:43
  • With the (seemingly) clear exception of tuition assistance, I'm forced to agree. Since I'm still getting my master's I might be able to make use of that. Clearly, I'll contact a lawyer first. – avgvstvs Feb 27 '15 at 12:59
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    @avgvstvs I don't know what you're talking about. Your LLC cannot provide you pre-tax tuition assistance. Anyone telling you otherwise is mistaken. Pre-tax education assistance can be provided through a specially set up plan to employees, but never to owners. – littleadv Feb 27 '15 at 17:19
  • To answer your question, yes, I would think everyone would be doing that, but I'm a pentester by trade and not a tax accountant or business lawyer. I don't know how this stuff works. – avgvstvs Feb 28 '15 at 1:02

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