Write off company loans immediately and turn them into cash
Partners of a corporation or partnership naturally want their company to do well, after all, their economic existence regularly depends on it. If the company needs fresh money, for example to open up new business areas or to carry out projects, the first port of call is the house bank. It is then often the case that the necessary funds have to be made available to the company out of its own pocket in the form of a loan, as banks refuse to provide financing despite the provision of suitable private collateral, particularly in the current financial market situation.
One’s own reserves, which were originally planned differently, are used because, after all, one’s own life’s work should not be endangered or one does not want to miss out on new business opportunities. A mere gift of loan funds to one’s own business is regularly not immediately tax deductible – it is mostly taxed money. A later deduction is only possible within the narrow limits of subsequent acquisitions, for example by means of a crisis provision or as a financial plan loan. In practice, this rarely happens, especially if market conditions and loan collateral were not agreed prior to a crisis.
The funds made available to one’s own company are lacking in the private sector. It is often not possible to withdraw the loans granted from the company in the short term, especially if long-term projects or investments are financed with them. If private liquidity requirements now arise, the question arises as to how and whether receivables from loans granted by the company can be “sold off”. The refinancing and redemption of the loans via a house bank is often prohibited. Own credit institutions resold or cancelled loan claims against customers: a collection company forced many a company into insolvency as a result. Often, however, the original loan application may already have been rejected, so that refinancing via a bank is out of the question.
In this situation, it may be possible to obtain liquidity from the state in the form of income tax refunds by donating and donating such a loan claim of the shareholder against his company to a charitable foundation. With the Law for the Further Promotion of Civic Commitment (Gesetz zur weiteren Förderung des bürgerlichen Engagements), an amendment to the law came into force in 2007 which allows taxpayers to claim amounts totalling up to one million euros as special expenses for tax purposes within a period of 10 years if these are donated to charitable foundations. The amounts are doubled for spouses. Contributions to charitable foundations do not have to be made in cash. Other assets, for example the receivables referred to here, can also be assigned. For tax purposes, this loan receivable is valued at the so-called fair market value. If the recoverability of the receivable is given, there is nothing to prevent a special expenses deduction when donating the corresponding amount. If the creditworthiness of the company receiving the loan is not beyond doubt sufficient to secure this value, the shareholder-managing director has the option of providing additional private collateral.
Interest should be charged on the assigned loan receivable at the rate customary for third parties. However, it does not have to overstretch this framework either. Interest should also be paid on an ongoing basis. Charitable foundations must fulfill their statutory purposes in a timely manner. This regularly requires corresponding income, in this case in the form of interest payments. As a shareholder-managing director of your own company, you usually have a respectable current income/salary with a corresponding income tax burden. From an annual taxable income of 52,152.-, the income tax burden is 42% plus solidarity surcharge for a total of 44.31%. If you are a church member, this tax rate increases further. Top earners pay from an annual taxable income of Euro 250,000 even a total of 47.47% income tax, excluding church tax.
If, for example, a loan of one million euros has been granted to the company and this loan receivable is donated, the special expenses deduction leads, with the corresponding income, to income tax relief and an inflow of liquidity of up to 474,700 euros, without taking church tax savings into account. In addition, the tax deduction for special expenses can be freely distributed over a period of 10 years from the date of the donation in order to optimally reduce income portions that are highly burdened by income tax.
This approach allows at least a partial return of the loan proceeds to the private sector without affecting operational concerns and liquidity needs. The decisive factor here from an economic point of view is that the assets from the tax reflux can also be invested immediately.
It is also advantageous that the company continues to know its creditor, the foundation. Unlike with banks, the loan receivables are not likely to be sold on, for example to the famous locusts or special purpose vehicles. The term of the loan can be designed for the long term in accordance with operational requirements, which gives the company planning security. Compliance with the golden refinancing rule can be ensured without any follow-up financing risk: after all, there is neither the risk of arbitrary loan termination nor the danger of surprise follow-up collateral demands on the part of a bank.
The value of the company can be positively influenced by the longest loan term in the company. This increase in value then accrues to the shareholder of the company. Finally, the establishment of a charitable foundation offers the opportunity to use it for the company’s own image and thus ultimately also to increase its value and at the same time to do good.
by Dr. Johannes Fiala and Dr. Uwe Dörnbrack
by courtesy of
www.halstenbeker-magazin.de (published in Halstenbeker Magazin 12/2008)
www.campingimpulse.de (published in CampingImpuls.de 01.2009, page 34-35 under the headline: Promoting the image and doing good at the same time)
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About the author
PhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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