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Article Date:
December 2010

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Tax Tips for Making Business and Personal Loans Correctly

What makes the IRS automatically suspect that a loan may not be a true loan?


Answer: The loan is suspect when you make that loan to your wholly owned corporation or to your brother, mother, or grandfather.


If the loan is not a true loan because you improperly documented it, executed it, or otherwise failed to prove loan status, then it is a fake loan for tax purposes.


Fake Loan to Your Corporation


The problem with a fake loan to a corporation or other business entity that you own is that the dollar amount of the fake loan becomes a capital contribution.


Fake Loan to Your Mom


If you make the fake loan to your brother or mother, it becomes a gift for tax purposes.


Big Difference


When you make a valid loan that does not get repaid, you deduct your loss in full as a bad debt.


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