What are my options for paying back a business loan?

by Loretta M. Tubiello-Harr, CPA | May 10, 2018

Question: I bought my father's business, including tangible (equipment and location) and intangible (client files, workers, etc.) items. I have registered with the state with a new name, and for payroll have my own employer identification number (EIN). I coded the "loan" in assets, which is for working equipment, computer equipment, and leasehold improvements. He says I cannot pay back the loan from the business account, as I will have to claim it (the loan) as income and pay taxes. Can I pay back an asset loan from company funds? Will I have to report that "loan" as other business income? I did not have to obtain a loan to start the business, and within a week I started paying him back. I just want to make sure that I am not doing anything wrong.

Assuming you meant that you borrowed the funds from your father to purchase the business via an installment sale, whereby you will be paying him interest and principal on the loan over time, you can pay back the loan from the business account. 

The entry to book the original loan is to add the assets you purchased to the balance sheet, and the offset is the loan plus any cash paid out of pocket for those assets, also posted on the balance sheet. Based on the type of assets purchased, you can depreciate them over time or possibly directly expense them based on your tax situation. The depreciation on the assets is the tax deduction, and the loan repayment is just an offset against the loan. 

Perhaps your father was saying that if your depreciation deduction is not as high as the amount of the loan repayment, you will be taxed on the profits used to pay the loan. It’s a matter of timing. Eventually you get the deduction for the entire loan amount through depreciation of assets. It just may not be in the same year and the same amount as the loan repayments. 

I recommend you seek tax advice to get the most out of the depreciation deduction and to address the related-party rules you need to watch out for when there is an installment sale.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Loretta M. Tubiello-Harr, CPA, is a principal with Tubiello-Harr & Associates LLC in Coopersburg, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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