Starting a Business

Taxable Income Vs. Loaned Money

Learn the difference so you know what you have to pay taxes on.
1 min read
Opinions expressed by Entrepreneur contributors are their own.

Tax court cases have asserted that advances from a loan or a line of credit don't constitute income if the transaction is considered to be a debtor-creditor relationship. If the creditor has an enforceable obligation against the debtor to force repayment, that's a loan. Another factor is whether an interest rate for the loan has been established contractually. The bottom line in your situation is that a loan pursuant to an arm's length transaction, such as a line of credit advanced by a bank, will be treated as a loan from a tax standpoint.

As always, some people have gotten creative in their tax planning. The tax landscape is littered with failed cases where people tried to disguise payments for future services as loans. A payment in return for a future obligation to render services, such as an advance of salary, isn't a loan. Be careful not to fall into that pit.

More from Entrepreneur

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.

It Started As a Joke and Turned Into a Startup That Raised $1 Million in Funding