Make Tax-Wise Loans to Your Business

When it comes to pumping new money into your business, there's often a right way and a wrong way. Generally, you will want to do the deal in the form of a loan. Here are some tips on getting the biggest tax-savings when you inject capital into your company.

Regular companies If your business is operated as a regular company, make a loan instead of a contribution of additional capital. Why? Because you cannot later withdraw part of your equity investment without worrying about adverse tax consequences. Most successful operations will have current or accumulated earnings and profits. That means dividend treatment will apply to all or part of any funds you want to take out of the company in the future. This is a poor tax result because dividends are taxable income to you, and your company gets no deductions. In contrast, if you lend the money to the company, you can be repaid with interest without tax problems. The loan principal payments are tax free. And the interest is tax deductible to the company, which puts additional cash in your hands without double taxation.

What if the bank is willing to make a loan directly to you, but not to your company? No problem. Simply make a 'back-to-back" loan to your company at the same interest rate. Don't use the borrowed funds to make a capital contribution. Then you'll be forced to make dividend payments to repay your loan from the bank.