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Millions of people received a tax refund last year. In fact, when you look the total number of refunds issued by the IRS in 2017 you may be surprised by the numbers. Nearly 75% of returns received resulted in a refund averaging around $2,782.
No doubt some of the refunds were used to make frivolous purchases such as for vacations or electronics. On the other hand, there were probably thrifty filers who used their refunds more wisely. For instance, they may have paid off debt, created an emergency fund, or invested in a retirement fund.
If you expect a refund this year, how will you use it? Perhaps you should use your tax refund to finance a startup.
Loan to Your Startup
It is possible to use your tax refund to finance your startup with a loan. In this case, you would want to consult an attorney to have formal paperwork drawn up. This way everything is done properly and legally which protects you and your startup.
The loan would include interest payments and the legal documents should reflect that. They should also spell out loan terms as well as any other details. Make sure to include what happens if your startup defaults on the loan.
Any interest payments you receive on the loan are taxable but the principal is not.
Should the startup file for bankruptcy, you would be included in the bankruptcy documents as a creditor. This means you have a chance at getting back at least some of what you loaned the startup.
Invest in Your Startup
Investing in your startup is a little different than loaning to it. It is called owner’s equity and when you invest you can take the money back out later. However, if money is withdrawn there may be tax implications as a result.
As an example, if the business shows profits, money taken out may be subject to capital gains taxes.
There is a downside of simply investing your tax refund to finance your startup. Should your company file bankruptcy, any creditors owed will be paid before those who have invested in the startup.
This means if you have loaned your money to the startup you will be listed as a creditor. If you make an investment, though, you may not get any money back through the bankruptcy proceedings.
Starting any kind of business, including a startup, is not without risks. Still, some say startups are riskier than other types of businesses you could invest in. That could be due in part to the high costs many startups initially experience.
Be that as it may, some of those costs may be deducted from the tax return of the business. If costs were to create the business or investigate the creation of the business they can be taken off the tax return. Unfortunately, expenses that are for licenses or assets are not deductible.
The way in which the tax deductions are made gets a bit complicated. Therefore, you should consult the advice of a tax professional when you first consider starting your own business.
Startups are not without risks. But using your tax refund to finance your startup could be the best loan or investment you’ve ever made.
This article originally appeared in Due.