Proper setup/treatment of Convertible notes/SAFE's

To ensure proper setup of the Convertible Note/SAFE Instrument, it is essential to pay interest to the Note holder. The interest amount should align with the Long term Applicable Federal Rate

applicable at the time when the note is issued.

In cases where the interest is not paid immediately, it should be accrued and treated as a debt that must be paid at a later date. This unpaid interest cannot be deducted for tax purposes until it is actually paid, and it should be recorded as an adjustment on the business tax return.

Failing to pay the proper amount of interest on the Convertible Note/SAFE or any business loan for that matter, means that the instrument does not comply with its rules and processes. This non-compliance can carry the risk of the convertible note not being recognized as capital contributions or equity, potentially leading to reclassification as income by the IRS.

Click Here to read an authoritative article about the Tax Treatment of Convertible Debt and SAFEs.