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.
Do I send her a 1099-MISC for the total amount paid to her in 2010 for these loan payments?”
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.
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.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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One thought on “Business Loan 1099”
I would be interested to hear more on this topic; I always find the requirements for filing a 1099INT to be very confusing. The instructions say the following:
Enter interest not included in box 3. Include amounts of $10 or more, whether or not designated as interest, that are paid or credited to the person’s account by savings and loan associations, mutual savings banks not having capital stock represented by shares, building and loan associations, cooperative banks, homestead associations, credit unions, or similar organizations. Include interest on bank deposits, accumulated dividends paid by a life insurance company, indebtedness (including bonds, debentures, notes, and certificates other than those of the U.S. Treasury) issued in registered form or of a type offered to the public, or amounts from which you withheld federal income tax or foreign tax. In addition, report interest of $10 or more attributable to a trust interest holder (TIH) of a widely held fixed investment trust (WHFIT), or accrued by a real estate mortgage investment conduit (REMIC), a financial asset securitization investment trust (FASIT) regular interest holder, or paid to a collateralized debt obligation (CDO) holder, as explained later.
Also include interest of $600 or more paid in the course of your trade or business not meeting the above criteria, such as interest on delayed death benefits paid by a life insurance company, interest received with damages, interest on a state or federal income tax refund, or interest attributable to a swap with significant nonperiodic payments.
These instructions do not appear to apply to a trade or business, not a bank. The $600 of interest paid in the course of a trade or business seems like it might cover the requirement, but they don’t even mention the most likely situation, which would be interest paid on a business loan. Is this instruction the basis for what most people use in determining they are required to file a 1099INT as a trade or business? Thank you.