A family member wants to lend me money for a business venture. I want to be able to deduct the interest I pay him as a business operating expense. However, I understand that the IRS is often skeptical of the deductibility of loans between family members. I want to structure the loan so they are maximally convinced.
For this purpose, I propose that:
- the promissory note specifies the business purpose of the loan
- the interest be charged at 4% compounded monthly, with late fees if I am late on a payment
- the funds be deposited in a business account, used only for business purposes
What else might I do to keep the IRS certain this is in fact a commercial loan, so that I can be sure the interest is deductible? In particular, how does the IRS consider term, amortization, and interest rate when determining whether it is a bona fide commercial loan?
Any general discussion or links to relevant IRS documentation is appreciated. I've poked around on irs.gov, but I can't find anything useful.