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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.
Posted in tax
Dear valued client:
A number of tax breaks that had expired at the end of 2011 or were to expire at
the end of 2012 were extended by the recently passed law, the "American
Taxpayer Relief Act of 2012." Keep these deductions and credits in mind as
you gather the paperwork for filing your 2012 tax return. Those that apply to
you or your business could cut your 2012 tax bill.
FOR INDIVIDUALS. The law restored for 2012 through 2013 the
following tax breaks:
* The optional deduction for state and local sales taxes
instead of deducting state and local income taxes.
* The above-the-line deduction for up to $4,000 for
qualified tuition and related expenses.
* The deduction for mortgage insurance premiums.
* The above-the-line deduction for up to $250 for classroom
supplies purchased by teachers.
* The exclusion from income for cancellation of mortgage
debt of up to $2 million on a principal residence.
FOR BUSINESSES. Included in the law's provisions were the
following items that could affect your business:
* The Section 179 first-year expensing option was increased
retroactively for 2012 and extended through 2013 at $500,000 for the purchase
of new and used equipment. The investment limit is set at $2,000,000.
* 50% bonus depreciation, which applies only to new
equipment purchases, was extended through 2013.
* Both the research tax credit and the Work Opportunity Tax
Credit were extended through 2013.
For assistance in identifying and utilizing all the tax
deductions, both new and old, to which you are entitled, please give us a call.
Last Updated by Noel Dalmacio on 2013-02-13 01:15:45 PM