Depends.
If you're an LLC, it really doesn't matter and I suggest having the entity as the borrowing entity as long as the LLC doesn't elect to be treated as an S-Corp.
If you're an S-Corp AND you want to have the ability to deduct any potential tax losses, YOU must be the actual borrower, NOT the entity. You will then lend the S-Corp the money, the S-Corp will owe YOU. This will give you basis in the S-Corp and allow you to deduct losses if any.
IF the S-Corp is the borrower AND you don't have any money on the table yourself, you will NOT be able to deduct any losses generated at the S-Corp level until you have tax basis.
Personally guaranteeing an S-Corp loan is NOT the same as being the borrower and will NOT allow you to deduct the losses without tax basis.
This is excellent advice. I was hoping that for all the visuals out here in the real world, if you would use this philosophy in an example that would show the young doctors how this might be an effective tax strategy for them.
Additionally, if the buyer personally borrows the money, loans it to the S-Corp which purchases a practice. Who amortizes the goodwill etc.?
The buyer of the assets amortizes the goodwill, the lender is simply the owner and the owner will "owe" the bank.
Please explain how the basis issue relates to the doctor’s personal return and the ability to offset certain losses and why this isn't double dipping. For example, the S-Corp writing off the purchase yet the doctor can personally use the loss against his personal gains.
I’ll try and keep it simple and stick to the "trap" that S-Corps can have. A few assumptions first:
1. Doctor has been working as an associate (employee) during the year earning $100k.
2. Doctor creates S-Corp to buy a practice
3. S-Corp has operating losses of $50k for the year.
4. The "bank" agrees to lend 100% of the purchase price so the owner won't have to kick in any money.
IF the borrower as defined in the loan documents is the S-Corp, the individual will have taxable wages of $100k to pay tax on. The loss of $50k will NOT be available to the individual to use against this income for this taxable year.
Here are a few fixes:
1. Have the loan documents with the individual as the borrower (you've probably guaranteed the loan anyway) and you lend it to your S-Corp. THIS will allow you to take the $50k loss.
2. Go with an LLC (assuming your state allows them) and have the LLC as the borrower. THIS will allow you to take the $50k loss. You can elect to be taxed as an S-Corp later on WHEN it makes sense.
As with anything you do, get good advice and plan accordingly.
I hope that helps.
This post first appeared on Dentaltown.
Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com
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