Personal loan to LLC

[Gretel]

I always get stuck on this one. Rental LLC has loan from one of the members who in turn has personal loan with bank. I don't think it is a good idea to have LLC back directly to bank since LLC has no legal obligation and is risking IRS throwing it out and their limited liability.

So, they should have loan agreement between member and LLC. On LLC level everything is dandy. LLC pays to member and deducts interest, then issues 1099-INT to member at year end. Now LLC member has interest income and interest expenses, which are personal interest expenses?

[Gretel]

Would there be any reasonable approach so member can take on pg 2 of Sch E? I don't think so since we are not talking about a biz but a rental activity.

[Gretel]

I guess I am the only one who is participating in my post.

Another thought. As a sole proprietor, if you follow the tracing rules, you can have a personal loan used for your biz and deduct the interest expense as biz expense.

Is that available to a partner in a partnership?

Is there a difference between being a partnership and a LLC?

[Gretel]

http://www.thecomputershow.com/nsa/gnginterestexpense.htm

For anyone who is interested, I think the info in the above post makes sense. So a partner in a partnership can take the interest on pg 2 of Sch E, whereas a LLC member cannot do this but needs to be reimbursed by the LLC.

Now I wonder if this somehow applies to other UBE as well and if only partnerships are allowed to do that. The IRS instructions for Sch E pg 2 are talking about partnerships not LLC members.

I hope someone from the real smart guys will respond to this after tax season.

[S T]

To give a bump

Gretel, to help out here as you are posting with yourself.

question - is the LLC filing as a partnership? and then I guess the question which you posed if LLC filing as a partnership, do the partnership rules apply?

Sandy

[Gretel]

Hi Sandy, appreciate your bump. Also send this question to NSA.

Yes, partnership, therefor subject to partnership rules. However, not all rules that apply to partnerships apply also to LLC's taxes as a partnership because of the nature of having limited liability by default and being a separate legal entity.

[kaimana]

Gretel...any "loan" to the business from a partner should have a promissory note from the business to the person that supplied the money. You are absolutely correct that the business should not be paying a personal loan directly. They should pay the actual lender, with interest and the lender should pay the bank that holds the loan.

If a 1065 this considered a part of his basis. If any other business return,this is capital and if sole proprietor it isn't reflected on the business return other than for payment of "owner loan to business" (which also should have a promissory note on file). This would be separate from what is considered "owners draw". The business expense is handled just like a credit card payment. Part of it is expensed as payment of business loan the balance is expensed as business loan interest.
kaimana

PS No problem with your posts here