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  1. #1
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    Oct 2009
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    Default Promissory Notes After I Sold My Business

    My question involves business law in the state of: Oregon

    I recently sold my business for a small gain. Throughout the transaction, I completely overlooked 4 personal promissory notes that i signed to fund the business. I know I still owe these debts, but how can I use them to reduce my tax burden? Do I pay them and get some release and apply it to my costs? Thanks for your help.

  2. #2
    Join Date
    Jun 2009
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    California
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    Default Re: Promissory Notes After I Sold My Business

    There may be some complicating circumstances due to the legal form of the business and the way you set up the paperwork on the loans, but you should be able to deduct your investment in the business from the profit in the sale of the business. For example, if you had a corporation and the proceeds of the notes were used to purchase shares of the corporation that would establish a basis for the shares. Your profit would be the difference between the basis and the effective selling price of the shares. Of course, if you mean can you double count it, meaning figure the profit as I just described and then deduct the loan payoff also, the answer is no.

  3. #3
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    Oct 2009
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    Default Re: Promissory Notes After I Sold My Business

    Thanks for your answer. So, my cost basis really goes up the exact amount of the promissory notes (or profit is that much less). Thats kind of what I suspected but needed someone else to clarify it.

  4. #4
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    Mar 2008
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    Default Re: Promissory Notes After I Sold My Business

    Quote Quoting BenGman11
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    Thanks for your answer. So, my cost basis really goes up the exact amount of the promissory notes (or profit is that much less). Thats kind of what I suspected but needed someone else to clarify it.

    I sold a business I owned several years ago. I did not sign promissory notes, but used a personal line of credit to finance part of the original acquisition, and I failed to see how the use personal credit lines or personal promissory notes increases my basis, and reduces my capital gains.

    If it does, that would've been something my CPA missed.

    I did find a good number of things that I contribtuted to my business, and failed to include them in my assets, adjusted those numbers, and increased my basis. I did an inventory count, and revalued my inventory. Without knowing the nature of the business, it's difficult to give more advice.

  5. #5
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    Default Re: Promissory Notes After I Sold My Business

    The issue here isn't whether there was a promissary note or a personal credit line, or for that matter, if you had a hoard of cash that you put into the business. The issue is, did you make a properly documented investment into the business, regardless of the source of the funds. If the books were not kept straight resulting in commingling of personal and business funds, it may be difficult to prove that the investment took place.

  6. #6
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    Mar 2008
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    Default Re: Promissory Notes After I Sold My Business

    Quote Quoting Scott67
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    The issue here isn't whether there was a promissary note or a personal credit line, or for that matter, if you had a hoard of cash that you put into the business. The issue is, did you make a properly documented investment into the business, regardless of the source of the funds. If the books were not kept straight resulting in commingling of personal and business funds, it may be difficult to prove that the investment took place.
    Yes, when I contributed funds into the business, it's recorded into an account called something like "loan from owner". When it was contributed via the "credit line checks", the check number and a copy of the check was filed away.

    During the sale of the business, I found that the basis had more to do with what assets the buyer is receiving, and the value of those assets. For instance, I bought an AC unit for the office, with my own credit card, a year before, and forgot to record it. I went back to book the transaction, crediting "due to owner", and debiting an asset account. An inventory count was done, and inventory was also revalued.

    So, if the OP forgot to include those notes in his "due to owner" account, such as in my case, purchases that I made and did not record, and there is a corresponding "asset" on the asset side to be recorded, then, I can see the basis affected.

    Fortunately, the sale of the business took place in Feb, and I still had to do my taxes for the prior year. What I did was I went back the year before and recorded those neglected entries in the prior year, like the entry for the AC among others, so it didn't look like I just made them up after the sale.

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