loan questions regarding money loaned to LLC

[John Yowpa]

hi all

My wife and I started two LLCs recently.

LLC #1 is her non-profit. This pays rent to LLC #2, which has the mortgage for the property.

In order to pay for the property we of course has to use personal finances for the building. Her LLC #1 is the only tenant. LLC #2 is run by the two of us, without any salaries or anything.

So my question is a few fold:
1. I assume that treating the money we paid out of personal finances for the % down for the property as a loan in the end will be best. This would be a loan that LLC #2 pays off. This would be instead of writing it off as a business expense.

2. I assume we should charge interest on the loan to the LLC. I cannot find the suggested rates of interest to charge.

3. I believe that we would have to declare the interest only as income - is that still the case since LLC #2 is an LLC?

4. I believe LLC #2 can declare the interest as an expense?

I am just a little confused how all of this comes into play. We are in NY state.

thank you!

[Kathy Henley]

@John Yowpa Time to read one of the books written by Garrett Sutton about setting up LLCs and putting the tax code to work for YOU. Find another book about non-profits, I know nothing about that business model.  Get with your CPA to see that you are on the right path in keeping records, doing it properly and avoiding tax fraud. 

The purpose each company is to make a profit. The income and expenses of each company will determine the profit. It might be that each company will file a tax return and the LLC members will declare the income, or loss, on their personal return. It depends on how your set up the LLCs, check with your real estate attorney.

Using personal money for a down payment on an investment property might be called capital (not a loan). Each member's roles and contributions to the LLC might be expressed as a percentage of ownership, when the LLC starts. Check with your real estate attorney and CPA that your LLC structure is clear. Later, capital can be returned to the owner as an 'ownership draw' and such a draw is not a taxable event.

Rent is a business expense for company #1 and would be income for #2. Company #2 may have other expenses - property tax, insurance, roof repair, landscaping, window washing and depreciation expense (my favorite).  Take a look at the schedule E of a US tax return, to see a list of expense categories when figuring property income. Aim for these categories when coding your receipts.  

Principal payments on the mortgage are not a business expense. The interest payments are a business expense. Don't overlook mileage and travel expenses.

Each LLC might also file a NY state tax return. Ask your CPA.