Discussion:Individual makes loans to business-ordinary or capital loss
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Discussion Forum Index --> Tax Questions --> Individual makes loans to business-ordinary or capital loss
| 19 June 2007 | |
| I have a client who, as an individual loaned money a number of times to start-up companies that went out of business. If this individual is in the business of making loans, his write off can be ordinary not capital.
However, I am having trouble finding information on whether he qualifies as ordinary? Thanks, HLD, JD | |
| 19 June 2007 | |
| I believe people that are in the business of loaning money needs to be licensed with the state. I'm not too sure about it tho. | |
| 19 June 2007 | |
| Ordinary would be in the case of a business expense. Agree with Pegoo; if this person is loaning monies, then he needs to have a business purpose for it or it is individual investments and would be capital... | |
| 19 June 2007 | |
| Thanks, I agree, but I am trying to prove this was a business purpose. I am pretty sure he did not have a license, but I also havent found the law on that yet either. Still looking. | |
| 19 June 2007 | |
| Sounds like gambling on a bet that these start up companies will eventually pay off. Does the client have notes with applicable interest rates, does he have agreements on what he gets if in default? Etc. etc. etc. | |
| 19 June 2007 | |
| I vote capital loss.
From your description of events it sounds like this client was a passive investor in a few startups that never got off the ground. | |
| 20 June 2007 | |
| I agree with Beth...so do court rulings on these type transactions. | |
Mtmckeecpa (talk|edits) said: | 20 June 2007 |
| Hl,
Look at the code & regs under 166 and 1.166-5(b) See also IRS Field Service Advice (FSA) 199911003 for factors to determine whether a TP's lending of money qualifies as a trade or business. | |
| 1 April 2008 | |
| I have a question related to this topic (in some way). I recall seeing some information that said that net income from a lending business was not subject to SE Taxes. But Now that this question is before me in a real way, I can't find the information I remember seeing.
Any thoughts? | |
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