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income from private company loan

Hi, All. I'm wondering how I should treat the income I made from a loan I made to a friend's company. Namely short-term versus long-term gain.

I made a $10k loan on 3/13/06. The terms called for repayment of the principal plus $3k within 3 months. Each month beyond that an additional $2150 would be added. Big interest, big risk. Anyway, the company was not able to pay me for a long time except for a $5k payment 4 months after the loan was made. Since then we have come to an agreement and I have "forgiven" the company much of the debt. We agreed on them simply paying me a total of $15k ($10k principal plus $5k interest). Here is how things have panned out:

3/13/06: $10k loan made to company 6/17/06: $5k payment made to me (count as all principal?) 3/10/07: $5k payment made to me (count as all principal?) 3/19/07: $5k payment made to me (count as all long-term interest?). This payment hasn't really been made yet but hopefully it's coming soon.

How should I compute the 2007 taxes on this? What IRS pubs might help? I declared nothing for 2006 taxes although I'm curious as to whether I could have declared a $5k loss since it was looking like I might not ever receive a payment after the $5k on 6/17/06.

Thanks! Matt

Reply to
matt.roos
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Interest on a loan is just that - interest. Short/long term applies to capital gains which a loan isn't.

And possibly big trouble! You didn't say what state you are in or even if you are in the US. Assuming that you are, I hope you are aware of the usury laws that make it illegal for private parties to charge higher interest than a maximum interest rate amount set by the state. For example in California 10% is the maximum while in Colorado the usury rate is 45%. Your 3K in 3 months for a 10K loan is 120% rate. I don't know of any state where that is legal and the penalties can be high (depending on the state). I know that isn't a tax answer but I thought I should make you aware.

--

-Ernie-

Reply to
Ernie Klein

So about 104% annual interest. Since that's an illegal interest rate in every state with a usury statute, your "friend" can probably have the rate reduced to the statutory maximum (or in some states, have the whole debt eliminated) just for asking. Oh, and RICO might mean that your efforts to collect debt with an interest rate more than twice the statutory maximum might constitute a felony.

You're still at 56% interest.

IMHO, you calculate payments as interest first, calculated on the then-present terms of the agreement. So a good chunk of the first payment is interest (I come up with $3,130). Assuming the remainder of the payments are made in 2007, you'd have an additional $1,870 of interest income in 2007. Worst case scenario, you've got even more interest income, and a bad debt deduction, which is likely the position the IRS would take, were you to be audited. Phoebe :)

Reply to
Phoebe Roberts, EA

Thanks for the info from you and Ernie! Although I should perhaps be worried about it, at the moment I just find it humorous. My friend is an MBA and CFO of his (small 3-man) company. He was the one that offered the terms. I guess he missed a few classes in school! I, on the other hand, can compute instantaneous rates based on annual rates (math adept) but know little of finance laws. Much obliged, Matt

Reply to
matt.roos

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