Borrow or Fund Capital Contibution

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zeep
Posts: 96
Joined: Sat Oct 04, 2008 3:03 pm

Borrow or Fund Capital Contibution

Post by zeep »

Good News with a string.. I'm promoted to a new tier of partnership, but must make an additional captial contribution.

I can either fund that capital contribution with my bonus from last year, or borrow from a bank my firm has a relationship with at LIBOR plus 2.75%. I think that interest is tax deductible as business interest.

If I borrow the capital contribution, I'd invest the bonus.

My emergency fund and 401K are fully funded. I'm in the 33% tax bracket and subject to AMT.

Wondering whether to fund the capital contribution from cash on hand, or borrow and invest the bonus.
grberry
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Location: Boston, MA

Post by grberry »

Effectively, you are choosing whether to purchase the firm and also borrow money to invest outside the firm. Would you borrow money to invest outside the firm if there was no change in your firm investment? If not, then you should use the bonus. If yes, then is the interest rate for the firm opportunity better than you would get in the market. If yes, take the firm loan. If not, take a loan in the market.
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CaliJim
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Post by CaliJim »

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grabiner
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Re: Borrow or Fund Capital Contibution

Post by grabiner »

zeep wrote:Good News with a string.. I'm promoted to a new tier of partnership, but must make an additional captial contribution.

I can either fund that capital contribution with my bonus from last year, or borrow from a bank my firm has a relationship with at LIBOR plus 2.75%. I think that interest is tax deductible as business interest.

If I borrow the capital contribution, I'd invest the bonus.
Ignore the use of the contribution. You are going to make this contribution one way or another, so the decision is whether to borrow X dollars (at a tax-deductible rate) and invest X dollars. Unless you would buy stock on margin at those terms, it's better not to take out the loan.
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