Monday, February 04, 2008

How to Finance a Business For Your Son or Daughter

First, how not to travel about it:

A cash loan is not the manner to go.

Neither is signing as surety for a bank loan

A gift of the amount required? Again, not the best approach

But these are the three most common but incorrect ways by which parents seek to assist
their children get started in business.

So what is the best way?

For United States occupants and citizens, Internal Gross Code 1244 supplies the answer.

If you give your girl $50,000 state to begin a new venture, and the business
travels abdomen up with the loss of the $50,000, there is no manner that the Internal Revenue Service will
allow you to claim this loss as a deduction.

Or say you loan her business $50,000. Again, if things make not work out, the
business will maintain paying you the interest until it runs out of cash, leaving
you with a worthless note.

Tax-wise, you have got a capital loss, which is deductible at the pitiful rate of
lone $3,000 per twelvemonth against your ordinary income. Or you can utilize the loss to
offset capital gains.

The same sad tax fate, somes capital loss, consequences if you subscribe as surety and must
pay Sue's $50,000 loan from the bank.

Tax-wise, a gift to your girl is even worse. The $50,000 is hers. As a
result, the tax loss is hers, not yours. Under the circumstances, opportunities are
that Sue have small or no income, and the loss is almost totally wasted.

Note too that a loan or a bank surety is often questioned by the IRS. Why? The
Internal Revenue Service postulates that the $50,000 was a gift because you never intended to seek to
accumulate in the first place. You had no sensible outlook of being repaid is
the manner the Internal Revenue Service sets it.

But now let’s look at Internal Revenue Service Section 1244 – the right way.

Section 1244 allows you to claim an contiguous tax deduction for a loss on stock in a
small business corporation. Your loss is fully deductible against ordinary
income, rather than a limited capital loss.

And you can claim a upper limit Section 1244 loss of $100,000 (joint return) in a
single twelvemonth or $50,000 on a single return

The upper limit amount you can claim as a Section 1244 loss in a single twelvemonth is
$100,000 on a joint tax tax tax tax return or $50,000 on a single return.

So instead of a gift, a loan or a bank surety, you and your girl set up a
corporation for her new business. You get $50,000 of stock in the corporation
that measure ups for Section 1244 treatment. Your daughter, who runs the business,
pulls a salary

If the business succeeds, your girl can gradually purchase back your stock (or,
better yet, you can gift it to her) over time. Any net income you do on the
redemption will be a low-taxed capital gain.

If the business fails, your loss will be fully deductible under Section 1244 (up
to the $100,000/$50,000 limits).

Here's another nice thing about Section 1244: The
tax benefits are
easy to get. The good tax treatment is automatic and no written program is
necessary.

A concluding point: Section 1244 is the manner to travel not only for your kids, but also
for your partner who might desire to begin a new business. And the same strategy
uses if you desire to venture into something new while keeping your present
business.

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