I've worked as a consultant and freelancer for one of the top 3 internet companies in the world, several fortune 500s and startups. I've helped launch startups, and also led architecture for many multi-million dollar revenue products as a consultant. During the time I worked as a consultant, I saved some money and began working on my own startup, as a solo founder. That was about 3 years ago.
I used about $15,000+ from savings to support my living expenses while I worked on a startup (basically paying myself to work for the startup). End of year 1. Over years 2 and 3, I received about $22,000 in loans from my family while I worked on the startup.
The startup is soon to launch. It's now been about 3 years. I am taking on a job where I will be a w2 employee soon (and at $60/hr will bring home around $6,200 each month after tax). From that I would like to pay off my family little by little, and also continue investing in the startup. The startup is not making revenue or profits, yet but I think it has great potential.
Are the loans I made to myself for the startup tax deductible?
Are the loans my family made to me also tax deductible?
Would it matter much if it came from the same bank account in my name?
Should I have to wait until the startup is profitable to pay others including myself and family?
Any tips are much appreciated. Thank you!
1. If you loaned to yourself, it depends upon what kind of company it is. (LLC, or other) Chances are you can only deduct what you actually spent of the loan, not the full loan.
2. As far as the loans they made you, they are likely not deductible, but I would consult a CPA (preferably one who specializes in corporate tax or similar, as most don't even know many of the tax benefits from my experience)
3. Bank account doesn't matter so much as how your company is structured (see question 1). i.e. if you're just operating under a DBA or a single member LLC then the IRS treats you as one and the same (a passthrough entity)
4. That's up to you. Paying back investors early I presume means you didn't offer them any equity? If you can afford to go debt free with minimal cash flow or production impact then why not.
These are questions for your tax accountant. It depends in part on what structure you gave your startup company. I'm not an attorney or an accountant but here are some things for you to investigate with your own specific situation.
Things to consider are that your business is not able to deduct losses for more than a certain number of years in a row. At some point the IRS says it's not a business, typically three years. Only interest payments on loans are expenses, not the loan amount itself. The amount you contribute from savings doesn't matter. What matters is whether the things you spent money on are related to the business and classified as business expenses. Using savings to pay your living expenses while you had no salary is not an expense to the business.
Typically you can't make a loan to yourself. What you can do is repay your investment with future earnings, reducing profits on which you would otherwise pay taxes. The money needs to be distinct, not muddled. Business checking account, deposits into the business checking account, bills paid from the business checking account or with business credit card. The moment you start mixing funds, you risk losing the corporate identity and ability to claim expenses.
Your family may be able to deduct the loans they made to you as an investment loss if you don't pay them back. If you do pay them back or you give them shares of your company in trade, it makes a difference.
It sounds like you might be in the worst situation where nothing was separate and nothing is deductible as an expense. And if you're just looking at this now three years later, it may be too late to go back in time for a chunk of it. Your ability to go back in time on taxes is limited. I don't think there's a remedy if you mixed your business funds with personal funds (paid expenses from your personal checking account or personal credit card that were for the business). Your living expenses would doubtfully ever be deductible.
These types of erroneous deductions are common triggers for an audit. This is why you need to consult a tax professional (one familiar with small business forms). You would probably need to be filling out forms 1040, C, E, and 3800, plus any state forms.