What business id to use for lending money and earning interest? Is that under business income or investment income?

[knguyen5972]

 We lend money to borrowers for real estate transactions so I have the business code as real estate- however, it does not allow for reporting of income from this lending practice- only for sale of property.  We don't own the property, just lend the money.  Is this considered investment income or business income and what is the difference? 

Also- how do I report return of capital instead of income? Some of this money is still being returned back to the partners as return of capital and not income yet?  How do we distinguish from "return of capital" instead of income?

[Critter]

Who is "WE" ?   Are we a partnership ?

[SweetieJean]

See OP's other post.

[SweetieJean]

"Some of this money is still being returned back to the partners"

[Critter]

You really need to consult with a CPA or bookkeeper if you don't know how to keep the books and understand the difference between income and principle repayments and how they are booked in, how it effects the partner's basis & how it effects the tax return.

[TaxGuyBill]

I agree with Critter, it would be in your best interest to go to a tax professional.

Here are a few thoughts to explain the basics of how things work:

From your description, I would think Code 522292 (Real Estate Credit) would be applicable.
https://www.irs.gov/pub/irs-pdf/i1065.pdf#page=48

The Partnership (assuming that is the case) files a completely separate tax return.  It reports the interest and fees as income.  The amount of Principal Payments the Partnership receives is not reported as income (but it will show up on the Balance Sheet)

The profit from the Partnership is passed on the to the Parnters by K-1s.  The Partners will pay tax on that profit.

The Distributions that the Partners receive are reported on the K-1.  It is up to each Partner to maintain their "Basis" in the Partnership.  If their Distributions exceed their Basis, that will be taxable.  Otherwise, there is no tax on the Distributions.

If the loan is secured by the Real Estate, it is a mortgage and you may be required to issue a Form 1098 to the borrowers.

https://www.irs.gov/pub/irs-pdf/i1098.pdf

Again, I think going to a tax professional is in your best interest, at least until you get things established and figure out how things work.