IRS short term business loan interest?
My son invested the money to start a business with me and reported taxes through his accountant as sole proprietor for 2011. During 2012, I took over the business and reported to the IRS as sole proprietor. Also, during 2012, my son took several draws of money from the business account that amounted to about 40K. This year, 2013, he deposited the 40K back into the account.
As sole proprietor of the business now, I plan to report this income as repayment of a loan. We did have an agreement that he could withdraw the money and return it later.
I know the IRS requires an interest rate be charged. I consider 6% interest enough. However, as I've researched this a bit, I see that the IRS says that an appropriate interest rate on a short term loan should be as much as 22% or 32%. That seems extremely high and would mean I would have to report that amount as income on Schedule C on the line for "Other Income."
Am I understanding this correctly? I prefer to report interest based on 6%. Can I do that?
- NALv 77 years agoFavorite Answer
You are definitely looking in the wrong place for interest rates.
One year short term taken out in January 2012 would have been .19% (or less than 1/5th of one percent)
Did you type in AFR to get to the applicable rates pages for when the loan was taken?
Did you see the extra decimal?
At any rate, the interest would be reported on schedule B.
- ?Lv 77 years ago
You should be able to safely use that 6% rate of interest at that time for that purpose and time in your life JUST make sure that you do have some very good written proof that this was a legally collectible loan for this purpose and time in your life in case that the IRS should want you to be able to verify it after you do fill out and file your 2013 1040 FIT return during the 2014 tax filing season for the purpose and time in your life.
Hope that you find the above enclosed information useful. 10/17/2013
- Bostonian In MOLv 77 years ago
The IRS expects market rates. If you use the federal rate, currently 3%, they won't likely contest it. Treasury securities were down below 1% and a few even went negative for a while.
All of that said, what you describe sounds more like a partnership than 2 sole proprietorships. That's a whole different kettle of fish...
- troLv 77 years ago
this might depend on the nature of the note, was it between you and your son as individuals or between your son and the business?
the interest would be the only income that would be reported, the repayment of a loan is not income