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» From: New York, NY Dear TaxMama: First, I just found your website. Very cool. Very nice. Hope you can answer my question. I am helping someone investment in a new business by making him a loan of $10,000 at 8%. With the loan proceeds, he is going to be able to acquire 400 shares of stock in this new business and be a principal and be entitled to a portion of the business earnings before dividends. My loan is being secured by 150 shares of the stock if it is not repaid in one year. I anticipate that they will be able to repay the loan from their earnings. Nevetheless, after paying me back interest and principal, he will also give me the added bonus (incentive) of 100 shares of stock. I will get the stock at the time the loan is fully repaid in one year. In addition, I will get 25% of any of his earnings as a principal. I assume I will get a 1099 for any interest up to the 8% stated on the note. I assume that I will get some kind of 1099 for any earnings. Question: With the loan repaid in full with interest, how do I handle the stock that I receive? Do I have a "zero basis" in the stock? Or, if the stock has a value next year of $10,000, will I have to report added income of some type? For capital gains, when does my "holding period" begin? James Dear James, What an interesting arrangement. And you're right, your basis in the stock will be -0-. Your holding period will begin when the stock is transferred into your name. You won't have to report any income until you sell the stock. Now, what's if you wanted to report income? It all depends on how you get the stock. I am not an expert in Non-Qualified Stock Options, but I believe that, if structured properly, you could elect to report the value of an NSO in the year you receive the stock. You'd pay tax on that income. And you'd give it a basis. Incidentally, if the stock, in your hands, qualifies as Small Business Stock, you'll get all the gain/loss advantages inherent in those special rules. Sit down and consult with an expert in stock options so you can structure this the best way possible. Great idea! Best wishes, Eva Rosenberg Your TaxMama  |
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