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Lending to Your Business? Do it Right
By Joseph Anthony
Where does your business go when it needs a loan? For many small businesses, the answer is…right back to the owner. If you have to lend money to your business, do it the right way. There are potential tax benefits for loans to your own business. There also are financial potholes that you could hit if you don't do things properly. Here are five things to consider. 1. Making and guaranteeing loans are different. Guaranteeing a loan the company takes is not the same as making a loan to the company yourself. If the company takes out a loan, that does not increase your basis. For owners of S corporations, that means you cannot take into consideration the loan when calculating any pass-through of losses from the business to your personal return.For example, if you own a company in which you have $5,000 in equity and for which you have guaranteed a $10,000 loan, only $5,000 of company losses could be passed through to your current personal tax return. If you had made the loan directly to the company, your basis would have increased to $15,000, and any losses up to that amount could pass through to your personal return."It goes back to the concept for S corporations that losses cannot exceed the sum of the shareholder's basis in the stock and any direct debt the shareholder has in the corporation," says Los Angeles tax attorney Thomas Henning, a partner in the firm of Allen Matkins Leck Gamble & Mallory LLP. 2. Initial investments usually aren't loans. If you're just in the process of starting a business, don't try to say that the money you've initially put into your corporation is a loan rather than a purchase of stock. That's a no-no. You have to actually put money into a company for the stock purchase involved in a startup, and that money cannot be repaid to you as if it had been borrowed. You can lend money to the corporation once it is established. 3. Document all your loans. This may sound obvious, but you don't want to make a loan just by writing a check to the company. You have to document what you're doing properly as being a loan from you to the corporation. You'll need to draw up a promissory note and specify a rate of interest on the loan and terms of repayment. You should also keep proper track of repayments of loan principal and interest. Failing to charge interest on the loan can result in a terrible double-whammy. One, you could have interest "imputed" to you — that is, the IRS could say you have to pay tax on money you should have received. Two, if your business is a C corporation that is losing money, the additional interest deductions simply will be added to the corporation's retained losses. In short, no current tax benefit for the payments made. 4. Watch your ratios. Proper documentation may also help you avoid having the loan re-characterized by the government as something else, such as an additional equity contribution. While from a tax standpoint it can make more sense to loan money to your business than to invest additional funds, there may be limits on how much you can actually lend. Some business advisors suggest not having a debt-to-equity ratio of more than, say, 3-to-1."The problem is that if the IRS feels your debt-to-equity ratio is excessive, they may say that the debt is really disguised equity," Henning says. "If that's the case, then those payments the company is making that you think are loan repayments could wind up being characterized as you giving yourself a dividend."That can make a huge difference in your taxes. Only the interest on loan repayments is taxable, but all of a dividend would be subject to tax. Additionally, a corporation could deduct as a business expense the interest charged on a loan. But if the money being paid out is a dividend instead, none of it would be deductible by the corporation. 5. There's no such thing as a simple loan. You also may have to deal with passive-loss rules and other issues when you lend money to your business. As with any complicated financial or business dealings, it makes sense to consult with your tax pro or attorney and other professional advisers before moving forward. The Benefits of Volume Licensing: Discounts and
More
By Jeff Wuorio
There are precious few slam dunks in the world of running a small business. But volume licensing of software products is one of the notable, if misunderstood, exceptions. In a universe where cost control and options are often few and far between, volume licensing offers a hard-to-beat combination of dollars saved and flexibility. "Once small-business owners really come to understand what volume licensing is, it just makes all the sense in the world," says Eric Ligman, business development manager for Microsoft's small-business segment. The rub is in knowing precisely what volume licensing really means, says Ligman, who acknowledges that the term is not clearly understood among many. Volume licensing can be likened to bulk discount acquisitions, only the "bulk" isn't necessarily required. Rather than purchasing necessary software on an as-needed, retail basis, acquiring through volume licensing allows you to obtain licenses in the quantities you need — from as few as five to as many as several thousand. This hits on the first significant advantage of acquiring software through a volume licensing program such as the Microsoft Open License program — cost savings. But there are other benefits too. Here are half a dozen. 1. Volume discounts. Saving money is obviously at the top of the list for most business owners. While software bought piecemeal over the course of a number of years can add up to a prohibitive expense, volume licensing is far more cost effective. For one thing, the initial expense is less. To illustrate: buying a single copy of Microsoft Office System 2003 via a conventional retail outlet runs $499. By contrast, acquiring the same software through Microsoft's Open License program trims the initial outlay to $456.The cost savings continue from there. One-time upgrades bought through retail cost $329. The Open License program trims that expense to $264 for upwards of two years. Add-ons such as InfoPath 2003 and eLearning are also included in Open License. Buying retail, on the other hand, means additional out-of-pocket expenses for both. Even the means of payment is advantageous with volume licensing. By locking in prices for a period of time, you can plan your software budget well in advance and make balanced, systematic payments. Not so with retail — when you need it, you pay for it, no matter how steep the expense. 2. License safety. While retail means a paper license that has to be safely stored, volume licensing offers electronic licensing — instead of paper that can be misplaced or destroyed, a license is stored electronically so that it can never be lost."If you lose a physical license, you lose your license — period," Ligman says. "That means you no longer have a product that qualifies for upgrades. With electronic licenses, there's no paper license that can possibly be lost." 3. Easier installation and management. Instead of different software programs with different identifications, volume licensing means one ID. That makes installation and subsequent management that much simpler. Also, with Microsoft Open License, you can manage your software license portfolios electronically, though eOpen. 4. Better training and education. Not even the best software on earth is worth what it costs if it's used improperly or inefficiently. With Microsoft Software Assurance — an additional volume licensing option — companies get superior product training, education and support than usually comes with conventional retail purchases. 5. Greater flexibility. Every small-business owner knows that his or her work isn't limited to the four walls of an office. With Software Assurance, users can obtain rights to use software at home, as well as the office. Not so with software bought through conventional retail. 6. Greater protection. Microsoft Open License program's strict licensing parameters offer greater protection from piracy, no matter if it's intentional or otherwise. (For tips on ridding your business of unlawful software piracy, see this article.) Even with these advantages, volume licensing is fraught with misconceptions among small-business owners, Ligman acknowledges. Some of them include:
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