Small Lending Business

[Harvey Lucas]

My client started a small loan business in 2007.

He formed an LLC, (sole member, taxed as a sole prop), got a business license, printed letterhead, advertised, etc, etc.

He loaned money to people amd they paid him interest, just like a bank or credit union.

Seems like a dumb question but, assuming he has a net profit after expenses, will the interest income that he recieves be subject to SE tax? I'm thinking that it will.

It seems odd that interest income would be subject to SE tax, but if you are in the business of lending money then it makes sense.

The interest collected on such an activity is gross business income on schedule C?

Thank You,

Harvey Lucas

[Black Bart]

Actually, it's a very

good question and I don't know either. Interest is passive, but a business is a business. Maybe it's looked at like, for instance, a rent-to-own business or rentals of mini-storage units -- an active sort of passive business.

Hope somebody else knows 'cause I'm interested too.

How ya doin', Harvey? Caught up?

[Snaggletooth]

Parallel Code?

Harvey, this is a crazy answer, but I believe your client may be subject to those code sections which apply only to financial institutions.

I know very little about them, but I've been told that financial institutions pay very little income tax. If this is true, I suspect that they have influenced tax legislation with their collossal lobbying efforts. I seriously doubt the lobbyist had your client in mind, however.

Poor answer, perhaps, but maybe a start. Maybe someone knowledgeable will post who knows much more than I do.

[Harvey Lucas]

Looks like a plain old Sch C to me

Thanks snagg, I looked in CCH MTG, pp 2383, "taxation of banks", it says, "Banks and other financial institutions are generally subject to the same tax rules as corporations, except with respect to capital loss limits, worthless securities and etc, etc that does not seem to be relevant.

By inference, my take is that it is business as usual, ie, it does not matter how the schedule C earned its profit, if it has a profit, it is subject to SE tax just like any other Sch C.

If client loans money to family and friends who approach him for a loan, and they actually pay him back, that is clealy interest income on a Sch B.

However, if the client actually goes into the business of loaning money, gets a business license, advertises and the like, that is a diferent story, then it seems reasonable that it go on Sch C (if he is a sole prop).

Anyway, that is how I see it, anyone disagree?

Harvey Lucas

PS: Hey Black Bart, I'm doing well, I stopped doing 1040's 1 week ago, only have time for working up extensions, have done 90 so far, expect 10 or so tomorrow, then it is knee deep in Quarterlies season that is already half over, ie, same ole, same ole....and you?