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Tax Law (Questions About Taxes)/Loans between related companies

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Question
John,
I often come across owners of two separate companies that are making loans due to cash flow issues.  My question is how to handle it when these loans can't be repaid because the company being loaned the money never generates enough income.  Is there income to recognized, can these balances be written off, if so how.  Any advice on this situation would be greatly appreciated.

Best regards,

Jeff

Answer
Jeff,

There is really no one answer to your question.  It depends on the circumstances, since it is considered a related party loan.  If it can be demonstrated that the loans were for a legitimate business purpose, the default may result in income to the defaulting company and a loss to the lending company.

If a legitimate business purpose cannot be shown neither income nor a deduction is allowed.

Bottom line, it all depends on the circumstances and what you can prove.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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