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What to consider before lending money to family and friends

 

When your best friend views your nest egg as a source of start-up funds for his latest business venture, or your nephew hits you up for a car loan, your first impulse may be to reach into your bank account to help. But it's a fact that loans to family and friends often end up straining both finances and relationships. As Shakespeare said, "Loan oft loses both itself and friend." In other words, if you lend money to friends, you often don't get paid back, and the friendship itself may disintegrate.

 

It's best to consider a loan to someone you love as an "arm's length" transaction. If you're pondering such a loan, keep the following in mind:

 

* You can just say "no." It's your money, after all. Do you really want to raid an emergency fund or dip into your child's college account to finance a friend's business idea? Think like a bank. It's reasonable to ask tough questions about the person's bank accounts, potential sources of income, planned use of loan proceeds, and spending habits before extending credit.

 

* Consider a gift. If you're comfortable sharing your resources, you may want to provide a monetary gift with no strings attached. In many cases, this is the best solution because neither you nor your friend expect the money to be paid back. Unlike a loan, this type of arrangement can forestall misunderstandings and hurt feelings later on. Of course, you should not give money if doing so would unduly strain your own finances.

 

* Formalize loans. If you decide to lend more than a small amount to a friend or family member, it's generally best to draft a written agreement. This can be as simple as filling out a promissory note (available online or at office supply stores). Such forms spell out the basic terms of the loan -- amount, interest rate, payback period -- and provide some limited protection should you and the borrower end up in small claims court. Another recent innovation is the use of direct lending (also called social lending or peer-to-peer lending) websites to facilitate loans between family and friends. For a fee, such sites can prepare loan documentation, send payment reminders, issue regular reports, even facilitate electronic fund transfers. If the loan involves a significant amount of money, check with your attorney.

 

Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.

 

23 Jan 2013
When can you deduct a business bad debt?

Posted in tax

It happens to butchers, bakers, and candlestick makers. It probably happens in your business, too: A customer doesn?t pay what they owe and you end up with a bad debt. Can you take a tax deduction?

 

The answer depends on how you account for income on your tax return. If you included the amount due from the customer in income this year or in previous years, it?s likely you have a bad debt deduction. You can claim all or part of the worthless receivable.

 

What if you record income as you collect the cash? In this case, since you don't receive the amount your customer owes you, and since you never reported it as income, there?s no deduction.

 

Suppose you lend money to a customer for a business reason and the loan becomes uncollectible. Is the loan considered a deductible bad debt?

 

Last Updated by Dalmacio Accountancy Corp on 2013-01-23 01:01:10 PM