Good morning all. What is taxable in note income and what is tax deductible? Trying to figure out taxes for my business and how to list it in my ledger. Thanks.

@Joshua Scott

Definitely want to talk to an accountant on this one as it depends on many factors.

Ok say if you buy a performing note. The principal buy is an expense and the monthly interest is income? 

Yes, the acquisition costs is an expense for you and the interest income is ordinary income providing that you are not acquiring notes in a tax-sheltered environment such as a self-directed IRA.

Thanks Bob. 

Not to open up a can of worms here, but I'm assuming this question also dips into a bigger question: What are the pros/cons of purchasing with cash vs. SDIRA? @Bob Malecki and @Chris Seveney -do you have any insight on that? 

Michelle, 

Nope. No underlying comparison here. Just asking simple question. I buy a performing note with my business what is an expense and what is taxable? Just simple calculations. 

Cash = tax Liability

SDIRA- (depending on type of IRA) deferred profits no tax liability

I do not recommend ever investing in your personal name. Use a properly structured entity to try and avoid personal liability 

@Joshua Scott The purchase of the note is an investment, so you should show it on your balance sheet as an asset.  The payments you receive have two components, interest and principal.  The interest from the note is taxable income and you should show it on your income statement.  The principal you receive reduces your investment on the balance sheet, as it is a return of capital and not taxable.  

I appreciate the answer. 

@Michelle Burdo , like Chris said, the interest income is taxed as ordinary income, so in an IRA its either tax deferred or tax free if under a Roth. I use my Solo 401K to participate in JVs and build the income tax free. FYI I use a personal property trust to take assignment/ownership of the note in the project.

Thanks for your question, Joshua, and for your answers, Chris, Bob and Bob. I'm a note newbie and the very important nformation I've learned from your posts is something I was unaware that I need to know but didn't know to ask. 

Should you want to delve into SDIRA details a good place to start is research one of the SDIRA companies.  I would suggest www.QuestIRA.com to start and you will find plenty of education for you to review.  There are other companies as well that can provide similar insight.