Sole prop owes big tax, 100%-personal or business loan to pay?

[Margaret CPA in OH]

As noted a sole prop owes about $4000 plus Q1 est of $2000+ so needs a loan to pay. Her bank rep and financial advisor were consulted and she will either take a line of credit or loan. She said both suggested she ask my opinion as to whether it should be personal or business.

Sch C income $42,000, divs $2000, HSA and sole prop insurance deduction $4500, 1/2 SE deduction $3000. I can be persuaded that the tax is due to business income however I also can be persuaded that she is paying income tax on her earnings, not terribly unlike an employee. (I'm sometimes easily persuaded)

Which persuasion does this board feel? My stronger inclination is personal. Thanks!

[PapaJoe]

Even though the tax on a 1040 results from business income, whether Sch C or W-2, the tax is a personal tax.

[Jack from Ohio]

As a sole proprietor, business expense is personal expense. No difference.

[Margaret CPA in OH]

Thanks for the quick, confirming replies. I just have to be prepared to support that, although business income, it is personal for income tax. We were getting along well until the final total then I was warned that she would NOT cash in her 401(k) to pay. I sent links to IRS payment options without extensive comments. Sigh....

[kcjenkins]

She's smart not to cash out her 401K, but she still needs to understand that she has to consider that her withholding was too low. Hopefully she's correcting that going forward. And yes, no matter how she arranges the loan, it's a personal use, so the interest is personal.

[Guest Taxed]

How many of your Sch C clients use home equity loans to pay for business expenses when cash flow is tight??? Use that logic!

[Margaret CPA in OH]

KC, she has no withholding as she is a sole proprietor. She just didn't pay enough inestimated payments in 2012. Had she done what the previous accountant projected, $2000 per quarter, her balance would have been about $800. She used the funds elsewhere. I think she expanded too quickly and that her rent is really high but she is in a great location so not looking elsewhere. It's mostly about prioritizing where to put one's available cash.

She rents an apartment so does not even have the option to have a home equity loan and her business assets are fully depreciated now. Not a lot of options until her parents pass away. She has told me that she is due to inherit over a million from the family owned bank but for now she really wants to make it on her own for which I give her credit. She just needs to plan better, I think.

Thanks again, all.

[kcjenkins]

How many of your Sch C clients use home equity loans to pay for business expenses when cash flow is tight??? Use that logic!

The point is that whether the interest id deductible depends not on where the money comes from, buy rather on what the money is used for. Used to pay her personal income taxes means it's not deductible.

[Guest Taxed]

The point is that whether the interest id deductible depends not on where the money comes from, buy rather on what the money is used for. Used to pay her personal income taxes means it's not deductible.

And how many taxpayers in America go by that when they have a 1098-Int in their hand and memory of that cruise!

[JohnH]

No borrowing ability and a big tax bill.

Looks like the client needs to consider an installment agreement.

And start paying estimated taxes as she is being advised.