Business Loan 1099

Today TaxMama hears from Lucy in the TaxQuips Forum, who needs to know. “ I purchased a business in 2010 by giving the original business owner a down payment and then monthly payments thereafter.  She is a limited liability company, but has dissolved the company in March 2010.
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  Do I send her a 1099-MISC for the total amount paid to her in 2010 for these loan payments?”

Hi Lucy,

When you have a loan, there is a note, with an amortization schedule.  Both of you should have a copy of that amortization schedule.  Your obligation is to send a Form 1099-INT to report the interest that you paid her – not the total monthly payments.

 If you don’t have an amortization schedule of the loan, you can easily create one using this tool, https://www.amortization-calc.com/ – be sure to put in the date of the loan, so you can get a printout by year.  (Check the box that says show results by year.)

She should be able to deduct the interest from the total payments to arrive at the amount of principal received.  On your books, you should have recorded the full amount of the loan.  At the same time, you should have made a journal entry recording what you bought – equipment, client lists, furniture, website, etc.
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  Some of those things might have been deductible immediately, others over several years.
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  You need an accountant to set up the original books and journal entry.

As you make the loan payments, you will reduce the loan by the amount of the principal.
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  You only deduct the interest expense as a business expense.  You will have already dealt with the rest of the purchase, when you set up the loan.

 And remember, you can find answers to all kinds of questions about buying businesses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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