Can You Repay Yourself Tax-Free from Business
Question from Business Owners:
If you made a loan to your new business, can you pay yourself back tax-free? In other words, are you going to be taxed when you pay back the cash that you invested into your small business.
What About Me? Did I make Loans to My Business?
When you started your business, you had to make a cash injection. They also call it a “capital contribution”. You had to put money into your business to get started, because you needed to get started and already had expenses (but no revenue, yet).
And then you spent that money. Finally, the business had enough revenue, maybe enough profits, to where you felt like you should pay yourself back.
Do I Have to Pay Taxes on That Money?
Here is a very simplified answer, but it is generally true. Yes, you can absolutely pay yourself back tax-free.
Why? Because generally speaking, a loan is a loan. A loan is not an income. Maybe interest received from the loan repayment is income, but not the repayment of the loan proceeds. You may pay yourself back tax-free.
Do you accomplish what you intended – to receive the business profits tax-free? Yes, until the business is profitable, and if you are repaying the loan. For the loan repayment, you pay no tax.
Wait, So I Pay No Taxes as I Become Profitable?
Not exactly. The business received revenues that enabled it to pay you back. Once your business revenues exceed expenses, then your business is profitable. Those profits will be taxable income to the business. If you work as a sole proprietorship, or you choose to treat profits as “pass-through income”, those profits will be taxable to you.
Can I Write-Off the Loans Paid to Myself?
You are not entitled to take a tax deduction, or “write-off” for proceeds used to pay yourself back from a loan. That should make sense because when you loaned money to the business, the loan was not treated as income to the business. Looking for the opposite side, when you take it back out, repaying the loan is not an expense for the business.