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
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
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.
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:
- I'm too small. Many small businesses assume that theirs is
simply too small an operation to qualify for the Microsoft Open
License program. Anything but. According to Ligman, businesses
with as few as two computers can qualify (this includes desktop as
well as laptop computers). The required initial order is five or
more licenses for any combination of Microsoft products.
- It's an obligation. Mention anything other than a straight up,
one-shot deal purchase and many small-business owners run out of
fear of some strangling long-term obligation. While Microsoft Open
License does, indeed, cover a certain amount of time, every
element of the program is available exclusively at the business
owner's choice. "There's no obligation to buy anything," Ligman
says. "These are just other options. You can just own the license
and not buy anything else moving forward from there."
- The software is somehow different. Many small-business owners
also have a hard time accepting the fact that Microsoft Open
License software is not one iota different from the Microsoft
products sold in retail outlets. They are, in fact identical. "It
may have something to do with the fact that retail was a way of
life in the '90s," Ligman says, "but these are the exact same
products that you can buy in a store."
- There's some funky purchase procedure. Acquiring the software
you need through Microsoft Open License isn't some form of
alchemy, or some complicated, mysterious process. You should
expect the software resellers serving you — from within a
worldwide software-reseller channel involved in the program — to
provide you with fast, efficient service, Ligman says. "It's just
as easy to buy [software licenses] as any boxed software program."