Expert: Ed McFarland - 3/6/2005

Question
-Ed - Based on your response, if he gives me a 1099 as a contract employee or we treat it as a loan either way I won't be paying federal or state tax on the amount that came out of my equity line, plus he can still take it as an expense. Is my understanding correct? And yes I should have "got it in writing"

Thanks
David
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Followup To
Question -
Ed - I have an unsual situation as follows. I am semi-retired and about a year ago a friend was starting a new business and he asked if I would work for him to get his company up and running. Here is the unsual part, he could not pay me so we made a deal that I would each month write myself a check against my home equity line which we would consider my salary and after he got to the point his company could afford to he would start paying back the money I took out of my equity line.

Now he can start paying back but he tells me that the money he pays back I need to consider it as income and pay taxes on the money. Somehow this does not seem quite right. Any thoughts would be appreciated.

David
Answer -
David,

Have him pay you with a 1099 (contract employee), not as a W-2 employee. That way he reports the payments and you can offset it with the loan repayments.

Another way is to treat it as a loan repayment.

Either way he can expense it, but it highlights why you should get an agreement in writing before you start.

Good luck

Answer
By the way you explain things, it should work out that way.

As a future reminder, you should put in writing, that way both sides can consider the pros and cons of the situation. And I don't mean you have to get a lawyer involved, just think the process through so there aren't any unintended results.

Good luck.