PCO Tax Implications: Loaning Your Pest Control Company Money

What Are the Tax Implications of Loaning Your Pest Control Company Money? Often PCOs have to inject cash into their businesses during seasonal slowdowns. How you structure this capital investment has a direct effect on the tax consequences. In addition, the type of business entity (corporation, LLC, partnership) you have created your business also affects the tax implications or consequences.

If you have loaned money to your business, you are required to charge interest on the loan; otherwise, interest will be imputed to you. This means that interest will be computed on the outstanding loan balance at the current rates and each payment will be considered to include interest. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid.

When you make a loan to your business, it’s important to charge an adequate rate of interest and document the loan with a stated repayment schedule.

Tax Implications: How will the IRS See it? Failure to prepare a promissory note may cause the IRS to reclassify a loan as a contribution to capital. This could have unintended consequences. You will not recover a loan that is reclassified as a contribution to capital unless you withdraw money from your business.
If your business is incorporated, generally this distribution must be made in the form of taxable wages or a taxable dividend. Repayments on a loan are not taxable to the extent of the principal.

Tax Implications Note: If you operate as a sole proprietor or a sole member disregarded entity (Schedule C – LLC), your business is not considered a separate entity for income tax purposes, and the above rules do not apply.

For a better understanding of how loaning your business money can impact your pest control business, contact us.