Home mortgage & Partnership loan

[TAXNJ]

Heard a conversation as follow:

- Husband & wife has a business LLC (Form 1065)

- Husband & wife Refinance with a new mortgage company

- New mortgage company tells them that 2 truck loans with the LLC will be paid off with the new home mortgage and existing balance becomes under the new mortgage loan

How would you handle this from a tax issue since the 2 truck loans are now under the new home mortgage and not know what the 2 truck loans principal and interest will be each year till end of loan periods.

[kathyc2]

So, I'm assuming the new mortgage is for their personal residence as opposed to a rental property owned by the LLC?

If that's the case then what they did was use personal money (equity in home) to pay off a business loan. On the LLC books you are going to have to debit loans payable and credit either due to member or an equity account.

Since the loan is secured by the house and not the vehicles, no pro-ration of interest IMO.

[TAXNJ]

Yes - however

So, I'm assuming the new mortgage is for their personal residence as opposed to a rental property owned by the LLC?

If that's the case then what they did was use personal money (equity in home) to pay off a business loan. On the LLC books you are going to have to debit loans payable and credit either due to member or an equity account.

Since the loan is secured by the house and not the vehicles, no pro-ration of interest IMO.

Thanks for the quick response post.

From what I heard, the new mortgage is for their personal residence. And agree with you "what they did was use personal money (equity in home) to pay off a business loan".

Also agree, "Since the loan is secured by the house and not the vehicles, no pro-ration of interest".

However, what is your meaning of "credit either due to member or an equity account"?

If I become part of the conversation, that's generally what I would tell the parties.

Thanks in advance.

[kathyc2]

Thanks for the quick response post.


However, what is your meaning of "credit either due to member or an equity account"?

I was speaking of the accounting entry on the books. The offsetting journal entry credit could either go to due to member account (liability) or equity account such as member draw.

[TAXNJ]

Thanks

I was speaking of the accounting entry on the books. The offsetting journal entry credit could either go to due to member account (liability) or equity account such as member draw.

Was thinking that was what you meant earlier. Thanks again for the reply post.

[kathyc2]

You're welcome. I don't think the refinancing was a smart move on their part, but what's done is done.

[TAXNJ]

Think

You're welcome. I don't think the refinancing was a smart move on their part, but what's done is done.

They refinance (personal) then intermingle a payoff of loans (business). Now would think the partnership would have a liability to the partners for reimbursement of paying off partnership loans or a contribution by the partners rather then a DRAW by the partners.

Agree was not a smart move on their part.

[TAXNJ]

Repost

You're welcome. I don't think the refinancing was a smart move on their part, but what's done is done.

Kayhtc2,
would this not be a liability of the partnership to the partners since the partners have paid the business loam with personal finds vs. a DRAW which maybe subject to SE tax ?

They refinance (personal) then intermingle a payoff of loans (business). Now would think the partnership would have a liability to the partners for reimbursement of paying off partnership loans or a contribution by the partners rather then a DRAW by the partners.

So the entry might be debit existing truck loans and credit to short term liability (partners) or credit partners contributions (equity).

Agree was not a smart move on their part.

[kathyc2]

Draws are not subject to tax- SE or otherwise. Also, a credit entry to draw account decreases it rather than increasing. They could set it up as a loan, in which case the interest would be a deduction to LLC and income to member. For FIT it would be a wash, but the interest portion would bypass SE tax.

For future reference, why I think this was a bad decision is:
1) They circumvented the protection of the LLC. In the event of LLC bankruptcy, the asset (vehicles) would be subject to be used to pay creditors, even though the members are still paying for them via mortgage.
2) They are now financing the vehicles over a 15-30 year term, even though they will be in the landfill before that time.
3) Even though the mortgage interest may be fully deductible for FIT, they are missing out on the deduction for SE and likely state tax.

[TAXNJ]

YES and like you said

Draws are not subject to tax- SE or otherwise. Also, a credit entry to draw account decreases it rather than increasing. They could set it up as a loan, in which case the interest would be a deduction to LLC and income to member. For FIT it would be a wash, but the interest portion would bypass SE tax.

For future reference, why I think this was a bad decision is:
1) They circumvented the protection of the LLC. In the event of LLC bankruptcy, the asset (vehicles) would be subject to be used to pay creditors, even though the members are still paying for them via mortgage.
2) They are now financing the vehicles over a 15-30 year term, even though they will be in the landfill before that time.
3) Even though the mortgage interest may be fully deductible for FIT, they are missing out on the deduction for SE and likely state tax.

yes as in your 9-3-15 reply post The offsetting journal entry credit could either go to due to member account (liability) or equity account such as member draw.

The setup of a loan (liability) to the partners is what I would generally suggest for them to consider if asked for a comment by one of the parties. Though, I agree totally with your 1,2,3 above and that also would be part of my comment.

Going forward the key comment would be to talk to their accountant and/or tax advisor and not the mortgage loan broker just to refinance (if that is what they did) - personal = personal and business = business - two separate issues.

Have a good holiday