Business loans and investments as income

[briandavis634]

I am the owner of a small business, a real estate company/LLC. Some of my income comes from a salary, but most of it comes from equity investments and loans. Would either of these (equity investments or loans) actually count as income? I do spend some of it for personal and family expenses, but most of it is spent on business expenses and paying back loans. 

[jtax]

Income is something that increases your net worth (an "ascension to wealth"). See https://en.wikipedia.org/wiki/Commissioner_v._Glenshaw_Glass_Co.

Loans are not income.  The cash you receive from a loan is offset by the debt obligation you take on to repay the loan.

Investments made are not income.

However, if you receive payments (or sometimes are just credited) for those investments (e.g. dividends, profits, interest, etc.) those payments are income (unless they are a return of capital or there is a exception (e.g. state and local municipal bonds)). If you sell your investment (shares, units, whatever) then you have income or loss as follows:  proceeds - basis. Basis is usually the price you paid for the investment, but there are some things that adjust basis. That depends upon the type of entity you invested in and its activities and payment history.

When you say you "do spend some of it" ... what does "it" mean? Some of the loan proceeds? You can't spend an equity investment unless you sell the equity or it pays some sort of dividend. Those details really matter. So if you want more info on this, please clarify.

[briandavis634]

I’m sorry, I should’ve been more clear about the investments part. I’m not the one making the investment. Instead, other investors are investing money into my company in exchange for a percentage of profits. I spend most of the money that I receive from these investments on business expenses, but some on personal expenses. So do I count all the money I receive from investments as income, or just the portion that I spend on personal expenses?

[jtax]

Are they investing by buying membership units in the LLC? Or are the securities you're selling not membership units? Is it a single member or multi-member LLC? Has the LLC elected to be taxed as a corporation? If so has it made an S-corp election?

If someone invests in your company it is generally not income to the company. But that can be very complicated depending upon the answers to the questions above and whether or not other owner's interests are being sold or new equity is being sold (diluting the prior owners).

The amount the company spends is tax-deductible in the same way any other company spending is or is not.

If you write yourself a personal check from the business account (or if you pay for your personal expenses from the business) you have received a payment from the company and that is probably a dividend and taxable to you. It also could be salary/wage income or self-employment income (Again it depends upon how the LLC is structured and taxed and frequently the amount of capital you have invested in the LLC).

Also note that you usually cannot sell securities without various SEC or state registrations. (Google "blue sky laws".) 

You should definitely seek the advice of a business attorney familiar with securities laws (most are not) before selling any equity or other securities and a CPA, enrolled agent, or tax attorney for specific tax advice. Only use these free volunteer Internet forums for an idea of the issues.

Good luck.