At Risk Rules For Sole Proprietor

[Unregistered]

If a sole proprietor funds his business with borrowed funds, mainly from his father, with an obligation to repay the funds once the business is profitable, would the loss from the first year in business apply to the passive activity loss rules where his losses can't exceed net income?

When he does turn a profit and begins to repay his father, does this individual need to document the repayment?

My only concern is the IRS might wonder how this individual is funding his business and by keeping a written record of the repayment of the loan, there wouldn't be any question of whether the father could be considered a partner in his son's business.

Thanks for the help.

[jimmcg]

Sole Prop-At Risk

As long as it is a bona fide loan obligation with an appropriate interest rate which is documented with a properly executed Note Payable (and Security Agreement if applicable) then the sole proprietor would be at risk to the extent of the loan amount. Any loss (absent other facts) would be deductable up to the remaining obligation amount. I would also run an amortization schedule for furthur documentation and to facilitate interest and principle payment data.... Also goes without saying all payments should be documented.