If I funded a sole proprietor as a silent investor (loan) can they write off the reciepts and inventory I paid for using my debt or credit card? I can be added to the LLC if needed.

[Texasbbs]

If I funded a sole proprietor as a silent investor (loan) can they write off the reciepts and inventory I paid for using my debt or credit card on their taxes this year? I can be added to the LLC if needed.

[leeloo]

You can't fund a Sole Proprietorship as a silent investor, but you can loan an individual money. If you treat the amounts you charged on your credit card as part of the loan, then yes, he can deduct those amounts.

To be clear, this is not a business investment, this is a personal loan. If you wish to be a partner and treat the money as a capital contribution, the two of you need to formally create a partnership.

[RobertB4444]

You are an investor.  So the business operates as though you had made no loans.  The only thing that shows that they received money from you are transactions on their balance sheet.  Your loan is not income to them - it just increases their operating capital.  So all the expenses that they pay are still deductions.

When you're looking at the balance sheet of this company there should be a credit for the money that you gave them (either as cash in the bank or assets that they purchased) as well as an offsetting amount in the 'long term liabilities' section.  That long term liability is the amount that they owe you.  When they give you back your money it isn't a taxable event - it's just a return of the money that you gave them.  But if they pay you any interest - and I hope you are charging them interest - then you will declare the interest earned as income on your tax return and they will declare the interest that they paid you as an expense on their tax return.

@Texasbbs  

[GeorgeM777]

Adding to what has been previously stated, if you take the position that the funds you gave the sole proprietor were indeed a loan and not an equity investment, the burden of establishing that the advances were loans rather than capital contributions rests with the you.  In other words, you bear the burden of supporting any position you take on a tax return in the event the loan/investment does not work out as intended.   Some of the factors that are relevant in terms of proving that an advance of funds was a loan rather than an equity investment and/or capital contribution are the following: 

(1) the names given to the certificates evidencing purported debt; 

(2) the presence or absence of a maturity date; 

(3) the source of the payments, and in particular whether they are dependent upon earnings; 

(4) the right to enforce payment of principal and interest; 

(5) whether the advances increase participation in management; 

(6) whether the “lender” has a status equal or inferior to that of regular creditors; and

(7) objective indicators of the parties’ intent.

A bad debt deduction and a loss from an equity investment have different tax treatment.  Thus, for tax planning purposes, it may be prudent to document earlier rather than later the nature of this transaction, i.e., loan versus equity investment.  If equity, then follow the advice of @Robert4444.  

@Texasbbs  

[Mike9241]

they may not even be able to deduct any expenses.   if you bought the items they sold using your credit card,  you are the one responsible for paying it.  if they use the cash method of accounting the only deduction they would get is when they gave you money to pay off the credit card debt.  they would have to use the accrual method. this would also require them to report sales on the accrual method.

[Texasbbs]

If I get on the LLC  now after the purchases, should that be ok (before filing)?

[PatriciaV]

Your questions are more legal than tax-related. You may wish to seek the advice of a local attorney with regard to back-dating an LLC agreement to cover these transactions. A better solution may be to consider the funding as a loan to the actual owner. Either way, you need legal advice.