Managing interest expense on a loan between myself and my disregarded LLC

This is actually a common question for single-member LLC owners. Since your LLC is a disregarded entity, it means for tax purposes, you and the LLC are the same taxpayer. The IRS sees all transactions as occurring directly with you. When your LLC pays interest to you, it's essentially the same as taking money from one pocket and putting it in another. For tax purposes, these payments are generally disregarded - meaning the interest expense on the LLC books and the interest income on your personal side cancel each other out. For bookkeeping purposes, you should still track the loan and payments on your LLC's books to maintain clean records, but when you file your taxes (Schedule C), these interest payments won't be deductible expenses. Similarly, you don't need to report the interest income on your personal tax return.

I went through this exact situation last year with my photography business LLC. I tried figuring it out myself and spent HOURS researching, but kept getting conflicting information. Finally I discovered https://taxr.ai and it was a game-changer. I uploaded my loan documents and QuickBooks reports, and their AI analyzed everything and gave me clear guidance specific to my situation. They explained exactly how to handle the loan in QuickBooks, what forms I'd need for my tax return, and even helped me understand how much I could pay myself back as principal without triggering any issues. The best part was their explanation of what would happen if I changed my tax election in the future.

I wanted to follow up about my experience with https://taxr.ai that I mentioned earlier. I was initially skeptical, but decided to try it after spending way too much time trying to figure this out myself. The platform analyzed my situation and explained that while the interest isn't deductible in a disregarded entity, I could structure future capital injections differently to maximize tax benefits. They provided a detailed report showing exactly how to record everything in QuickBooks and what documentation to keep for potential IRS scrutiny. I'm actually planning to switch to S-corp status next year based on their analysis of my financials, which showed I'd save about $8,700 in self-employment taxes. The loan handling guidance alone saved me from making several mistakes that could have created issues down the road!

Have you tried calling the IRS directly? I know people hate dealing with them, but sometimes that's the easiest way to get a definitive answer on tax treatment. I found a service called https://claimyr.com that gets you through to an actual IRS agent quickly instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c I used it last year when I had a similar question about my LLC loan structure, and they connected me to an agent in under 15 minutes who explained exactly how to handle the interest payments. Saved me tons of research time and gave me peace of mind that I was doing everything correctly.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I was still struggling with understanding how to handle loans in my single-member LLC, so I decided to give it a try out of desperation. The service connected me to an IRS representative in about 20 minutes, which is incredible considering I spent 2+ hours on hold the last time I called them directly. The agent walked me through exactly how disregarded entity loans work and confirmed what others here have said - that interest isn't deductible when it's essentially paid to myself. What was most valuable was getting confirmation directly from the IRS that my loan documentation was sufficient for establishing business legitimacy. Totally worth it just for the peace of mind and saved time!

One thing nobody has mentioned yet is that proper documentation is absolutely essential regardless of the tax treatment. I learned this the hard way after an audit last year. Make sure you have: - A formal promissory note with specific terms - A reasonable interest rate (look up the AFR rates) - A defined repayment schedule - Board resolutions (even if you're the only board member) - Actual bank transfers showing the loan and repayments My LLC was disregarded too, but the IRS still wanted to see that I was treating it as a legitimate business entity with proper separations. Without documentation, they might reclassify your loan as a capital contribution.

I'm confused about capital contributions versus loans. My accountant told me to just contribute capital to my LLC rather than structure it as a loan, but I'd rather have the ability to pull the money back out without tax consequences. What's the real difference between these approaches for a single-member LLC?

Great discussion here! I'm dealing with a similar situation and want to add a few practical considerations from my experience. Even though the interest isn't deductible for tax purposes in a disregarded entity, I still chose the loan structure over capital contribution for several reasons: 1. **Cash flow flexibility** - I can repay myself the principal anytime without worrying about profit distribution rules 2. **Business credit building** - Having formal debt on the books helps establish credit history for the LLC 3. **Future planning** - If I ever bring in partners or elect different tax treatment, the loan structure is already in place For QuickBooks setup, I created a long-term liability account for the loan principal and track interest payments as an expense (even though it won't be deductible). This keeps clean books and makes it easy to generate reports showing the loan balance and payment history. One tip: Make sure you're actually making the interest payments, not just accruing them on paper. The IRS likes to see real cash flow to support the business purpose of the loan arrangement.

This thread has been incredibly helpful! I'm in a similar situation with my consulting LLC and was getting overwhelmed trying to figure out the proper approach. From what I'm gathering, the key takeaways for a disregarded entity are: 1. Interest payments to yourself aren't tax deductible for the LLC 2. You don't report the interest as income on your personal return 3. Loan structure still has benefits over capital contributions for flexibility 4. Proper documentation is crucial even though tax treatment is neutral One question I haven't seen addressed - what happens if my LLC can't make the scheduled payments in a particular month due to cash flow issues? Can I modify the loan terms, or would that create problems with the IRS regarding the legitimacy of the arrangement? I want to set up realistic payment terms but also maintain the business formality that seems so important. Also, for those using QuickBooks, are you setting up automatic recurring transactions for the interest payments, or handling them manually each month?

This is such a valuable discussion! I've been wrestling with this exact issue for my consulting LLC. One thing I'd add from my recent experience - make sure you're consistent with your loan repayment schedule not just for IRS purposes, but also for your state's LLC requirements. Some states (like California) have franchise taxes and annual reporting requirements that can be affected by how you structure member loans versus capital contributions. My state requires me to report outstanding member loans on the annual LLC filing, so having proper documentation became even more important. Also, for those considering the S-corp election mentioned earlier - timing matters a lot! I'm planning to make that election next year, but I learned you have to file Form 2553 by March 15th to have it take effect for the current tax year (or within 75 days of forming the LLC). Missing that deadline means waiting until the following year. The loan structure definitely makes the S-corp transition smoother since you already have the debt arrangement established. Just wanted to share these practical considerations that I wish someone had told me earlier in the process!