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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.

 

13 Feb 2013
Pay attention to restored deductions for 2012

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