Restyling & Truck Accessories - February '15

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Page 43 of 48 FEBRUARY 2015 | Restyling & tRuck AccessoRies 41 Quite simply, money invested in a business can be withdrawn, with a tax bill on any profits from the sale of that capital investment. A loan made by an aftermarket ac- cessories professional to his or her business can, on the other hand, be repaid tax-free—that's if the ever-vigilant Internal Revenue Ser- vice accepts it as a bona fide, arm's length transaction. On a similar note, it can also be expensive for any owner, partner or officer who attempts to take money from their business. Once again, there is the risk the IRS might view the move- ment of funds from the business to the owner/partner/office/share- holder as a taxable event. Imputed Interest It should be increasingly obvious that something apparently as sim- ple as taking money from the busi- ness or even putting funds into the business can be painfully expen- sive under U.S. tax rules. Those tax rules are quite clear—only bona fide loans and contributed/ invested funds qualify for any sort of tax break. When either lending to or borrowing from the shop or business, every owner, partner and shareholder should keep in mind that in order to count in the eyes of the IRS, any transaction must be a legitimate, interest-bearing loan. Under our tax rules, an own- er, partner or shareholder borrow- ing from his or her business can face a hefty tax bill should the IRS view the transaction as a dividend payout rather than a loan. All too often, it is below-market interest rates or the lack of evi- dence of an arm's length transac- tion that draws the attention of an IRS examiner. The IRS is particu- larly interested in (1) gift loans, (2) corporation-shareholder loans, (3) compensation loans, between em- ployer and employee, (4) loans be- tween independent contractor and client, and (5) any below-market interest loan in which the interest arrangement has significant effect on either the lender's or borrower's tax liability. Should the IRS re-characterize or re-label a transaction, the result is an interest expense deduction when none was previously claimed by the borrower, and unexpected taxable interest income on the lender's tax bill. The lender's high- er tax bills, tax bills that can date back several years, are usually ac- companied by penalties and inter- est on the underpaid amounts. Always A Borrower Be For many automotive aftermar- ket accessories businesses, borrow- ing means a loan from the owner or shareholder. In some cases, it is the owner or shareholder who borrows funds from the busi- ness. Loans and advances between these so-called "related parties" are quite common in closely held businesses. Corporate loans to shareholders are probably the most commonly seen by IRS auditors, with advanc- es from shareholders to the incor- porated manufacturer, distributor, retailer or installation operation running a close second, particu- larly in the early years of closely held but thinly capitalized corpo- rations. The IRS's interest in these transactions stems from the tremendous potential for tax avoidance— inadvertent or intentional. When an i n - FEBRUARY 2015 | Restyling & tRuck AccessoRies 41

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