What kind of side business?
- Schedule C sole proprietorship or single member LLC
- S- or C-corp
- Partnership with someone else
- Something else
Will your wife be involved in the business?
- Silent partner (investor)
- Active partner (participates materially in the business activities)
- Employee
- Subcontractor
If the loan was made in 2021, your fiancée must report as taxable income, the interest they charged you or could have charged you, even if they did not actually charge interest. This is called imputed interest. When you loan money you are supposed to charge interest and the IRS requires you to report the interest as income even if you don't charge interest, using at least the minimum federal rate (AFR, applicable federal rate). This is variable and changes every month.
https://www.irs.gov/applicable-federal-rates
For example, if she made the loan in September, 2021, with interest compounding annually, the AFR was 0.17%. For a $10,000 loan, that's $1.41 per month of interest. The AFR has really risen with inflation. If the loan was made now, the AFR is about 2.2%. And of course, if they charged more than the AFR, they report as income the interest they actually received.
She should report interest on her 2021 tax return. If you get married before the end of 2022, she can forgive the loan and then you don't report any more interest, but you also don't report loan payments as a business expense. The forgiven loan becomes part of the business capital.
Exactly how the forgiven loan is treated depends on the kind of business, per my questions above. 99% of the the time the answer will be very simple, but I wanted to make sure we don't have to cover one of the 1% edge cases.
Also, if she wants to keep her finances separate and have you repay the loan, we can also talk about that. It's another unusual situation.
