A lesson can be learned from the trials of former Ultimate Fighting Championship pioneer Royce Gracie, another celebrity dealing with public battle with the Internal Revenue Service. Gracie is facing a number of fraud claims revolving around questionable loans. Allegedly, the loans reflect possible attempts to hide income. Concerns about possible false deductions of loan interest have been raised. The U.S. Tax Code has specific rules in place regarding loans and entrepreneurs should follow additional steps in order to address any claims of fraud by the tax agency.
Legitimacy, Loans and Deductions
There are two major rules in effect when a loan is taken out for business purposes, the interest may be deductible. There must also be a definitive intention to pay the loan back.
For example, a business that purchases a computer on credit for purely business use may take a deduction for the cost of the computer and the interest on the loan. Purchasing a computer for personal use and deducting the purchase and interest as a business expense, however, would be fraud. Also, "lending" someone money with no real agreement for repayment as a form of compensation for professional services rendered may be construed as fraud since the loan may be deemed income.
The following two steps should be enacted to prevent or address IRS troubles:
Create Proof of Business Loans
Anyone hoping to take make loan interest deduction claims should maintain records proving legitimacy. Returning to the previous example of the computer, the browsing history should never be deleted nor should any logs of downloads. Unedited copies of download reports, program files, and internet browsing history could be submitted as proof of legitimacy during an audit. Obviously, no personal software or browsing should be done on the computer in order to ensure the integrity of the claim for business use is not undermined.
Establish the Proof of Repayment
Business to business or person to person loans might seem suspicious to the tax authorities. Assumptions that the loan is a form of income requires proving the money is the former and not the latter. Handshake and verbal agreements won't help in the matter even if both parties are agreeable to such arrangements. Actual written documents detailing the loan and its terms must be crafted. Logs of all repayment transactions must be made. Receipts detailing the date and amount of the payments should be kept. Without clear details of repayment, the appearance of fraud is hard to avoid.
For more information, contact a tax attorney, like Dermot F Kennedy.
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