Tax Consequences of Seller Carryback Loan

What is the name of your state? Washington State

I am in the process of selling my business. The buyer cannot qualify for financing for the agreed upon price, so I am lending him $65,000. Three questions:

1) Is there a legal limit to the amount of interest I can charge? (We have agreed upon a 14% interest rate for 10 years)

2) Will I have to pay taxes on the loan as income?

3) If so, would there be any tax benefit to setting up a LLC or seperate corp to collect the payments, so as to offset some of the tax liability?

1. Many states have a usury law that limits the interest one individual can charge another individual on a loan. (Banks & certain other businesses are generally exempt from the usury rate limits.) Washington law says that an interest rate is illegal if it exceeds 12% simple interest or 4 points about the T-bill rate for the last 26 weeks, whichever is greater. Since 26-week t-bills are paying less than 8%, the max legal rate is 12% simple interest. Here's the official state site: http://www.dfi.wa.gov/consumers/interest_rates_law.htm


2. You'll have to pay taxes on the interest collected & will probably need to file Schedule 2 or B every year. Whether the principle is taxable depends on whether you set the deal up as a full sale & a separate loan or as an installment sale with the buyer paying XX% down & paying $65,000 plus interest over the next few years. You might want to consider what type of collateral you should have -- if you use the business as the collateral & buyer runs the business into the ground, the collateral is worthless. OTOH, if buyer owns a house, you might take out a junior lien. I doubt the buyer has enough equity to fully secure the lien, but the house might be worth enough in 3-5 years to protect you.

You should definitely hire a lawyer to draw up the sale agreement & the loan documents & make sure any liens are properly recorded.


3. No.

Deal is set up as full sale + seperate $65,000 loan.

Is the loan then taxable?

ca2 said:

Deal is set up as full sale + seperate $65,000 loan.

Is the loan then taxable?

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Again, the interest on the loan is taxable income to you, and a tax deduction to the buyer. The actual principal of 65,000 is not taxable to anyone.