Close this search box.
Blog » Business Tips » Should You Use Your Tax Refund to Finance Your Startup?

Should You Use Your Tax Refund to Finance Your Startup?

Platform Signup Friction

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 However, if money is withdrawn there may be tax implications as a result.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.

Other Considerations

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.

About Due’s Editorial Process

We uphold a strict editorial policy that focuses on factual accuracy, relevance, and impartiality. Our content, created by leading finance and industry experts, is reviewed by a team of seasoned editors to ensure compliance with the highest standards in reporting and publishing.

Financial Author
Kayla is passionate about helping people get their finances in order so they can pursue a life of freedom. She quit her job to work for herself with over $148,000 of debt and swears it was the best decision she’s ever made!

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.


Top Trending Posts

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More