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I loaned $60,000 to my own single owner LLC over the past 6 moths to pay for start up, salaries, rent and business expenses to get it started.

It is now moving towards profit and can afford to start paying back that loan.

My question is can the loan repayments be paid from the income before tax, or can it only be paid from taxed income? Where is this stipulated in the tax code?

So which of these is correct:

Case 1: Income - ongoing business expenses - loan repayment = profit which is taxed or Case 2: Income - ongoing business expenses = profit which is taxed and loan is paid from residual profits.

My instinct is it should be Case 2 because if the LLC had sufficient income from the start then salaries, rent etc. would have been paid and treated as a business expense?

Thanks,

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    Did you charge your LLC interest? I think that is the part that is potentially deductible as a business expense. – Joe Jul 29 '16 at 15:29
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    What country are you asking about? Different countries have different laws – littleadv Jul 29 '16 at 16:39
  • Thanks for you answer. Just to clarify. 1. Yes it is a US LLC. 2. I have a promissory note in place stipulating terms and interest to be paid on the loan. 3. I will declare that interest as income on my personal tax return. 4. You say "Repayment of your loan by the LLC would just be another business expense for the business itself" So you ate saying the LLC can repay the loan from income and treat it as a business expense before tax. So the following applies INCOME-BUSINESS EXPENSES-LOAN REPAYMENT = PROFIT which is taxed. 5. Where can I find this rule in the tax code? Thanks, Tom – user45749 Jul 30 '16 at 19:51
  • @joe if he charges the LLC interest, that is an LLC business expense, but it is also income for OP personally. He can check with his accountant but it may be a wash. – Harper Jul 30 '16 at 23:35
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Think about how loans work for you personally. When you charge a $50 dinner for two to your Visa card, you did not earn $50 in income. You did not pay income tax on that $50. The money you use to pay back that $50 at the end of the month is not tax deductible.

Interest on a loan is a business expense.

Repayment of principal is not a business expense, just as receiving the loan in the first place is not business income. Effectively this means the LLC repays the loan with after-tax dollars. Just like you do with your Visa card.

When I do corporate accounting, payment of loan interest shows up on the expense side of the Profit/Loss statement, and it makes the Balance Sheet net assets go down. However payment of loan principal is effectively null. It doesn't appear on the Profit/Loss at all -- and it's a wash on the Balance Sheet, as both Assets and Liabilities fall by the same amount.

  • Unless the LLC is specified to be treated as a corporation for tax purposes, there are no "after-tax dollars", because as a standard rule (unless elected to specifically), U.S. LLC entities use pass-through taxation, so the only tax being paid is by the principals when they take distributions from the LLC and claim it as personal income. – Daniel Anderson Aug 1 '16 at 2:17
  • Then it's even more a wash. – Harper Aug 1 '16 at 4:14
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Assuming you are talking about an LLC in the United States, there are no tax repercussions on the LLC itself, because LLCs use pass-through taxation in the U.S., meaning that the LLC does not pay taxes.

Whatever you take out of the LLC in the form of distributions goes onto your personal income tax as ordinary income, and you pay personal income tax on it. See this link on the subject from the Nolo.com web site:

Tax treatment of an LLC from the Nolo.com web site

Repayment of your loan by the LLC would just be another business expense for the business itself. I guess the question would then turn on what your personal tax repercussion would be for payments received from the LLC on the loan. I would guess (and I emphasize "guess") that you would pay tax on any interest gain from the loan payments, which makes the assumption you made the loan to include interest. If not (in other words, if you made this an interest-free loan) then it would be considered a wash for tax purposes and you would have no tax liability for yourself.

To reiterate, the LLC (if it is a U.S.. entity) does not pay taxes. Taxation of LLC income is based on whatever distributions the principals take out of it, which is then claimed as taxable personal income.

My apologies to littleadv for not making my prior answer (I deleted it) more clear about my answer assuming you were speaking of a U.S.-chartered LLC.

I hope this helps.

Good luck!

  • @Harper, you're correct. You can create an LLC and elect taxation treatment as a corporation, although that DOES eliminate one of the principal reasons for using the LLC entity in the first place. It is very rare for anyone to go that route unless they intend to later convert the entity to a corporation for purposes of soliciting investors. – Daniel Anderson Jul 30 '16 at 23:52
  • Yeah, that LLC-as-corporation is proving to be a red herring, forget I mentioned it. – Harper Aug 1 '16 at 4:16

protected by Dheer Oct 4 '17 at 6:24

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