Q. We are starting a business in New Jersey. We plan to start operating after March 15, 2022. It’s an LLC and we have a good lawyer who writes and reads our contracts. I want to loan the business the start-up funds – $250,000 – that we have saved for this purpose. However, when the LLC starts paying us back, I don’t want to pay taxes on the loaned amount, just the interest. How does that come about and what about the accessories you have to buy that cost less than $20?
A. Congratulations on starting your new business.
It is important to understand what is happening in situations like this.
It is not necessary to treat the funds used to start the business as loans, unless you plan charge interest to the business, which isn’t necessarily the right decision for tax purposes, said Michael Karu, a certified public accountant at Levine, Jacobs & Co. in Livingston.
He said you will get it back as income and the company will get a deduction for interest.
For federal purposes, that will wash out, he said, but not necessarily for New Jersey state purposes, Karu said.
New Jersey is a gross income state. As a result, partnership losses can only offset partnership gains, he said.
In addition, there should be a note certifying the loan.
“The LLC would issue a 1099-INT for the amount paid to the lender,” he said. “If the members are not contributing pro-rata to the business and the intention is to repay the loan, this is a good option.”
If the funds are deposited on a pro rata basis, the alternative is to deposit the funds as capital contributions, Karu said. Then you would simply take a profit distribution as needed.
Regarding expenses, Karu said you should keep receipts.
“You don’t need hard copies. Electronics are fine,” he said. “Then reimburse whoever paid for those business expenses and record the expenses. While many items may be de minimis, they will add up.
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.