By David M. Kendrick, CPA, MST
Loans between shareholders and their closely held S corporations are fairly common. Shareholders may require an advance from the corporation or the corporation may need a temporary cash infusion to meet expenses. While this is a legitimate business practice, if a corporation issues a below-market loan, the lender's payment may be reclassified by the IRS as a dividend or other taxable income rather than a bona fide loan which usually results in adverse tax consequences. The courts have considered a variety of factors in determining what constitutes a bona fide shareholder loan. These factors include the payer's intent, the requirement of repayment, the existence of a documented note, a stated interest rate, a reasonable maturity term, the shareholder’s level of control over the corporation, and the ability of the shareholder to repay the loan. Keep in mind that while you may be the sole shareholder of your S-corporation, it is still a corporation, a separate entity for legal and tax purposes and transactions need to be made in a professional, arms-length manner in order to be respected by the IRS. Now may be a good time to clean-up the books and settle shareholder loans.
Settling shareholder loans:
Tax Consequences: The structuring of shareholder loans and distributions and forms of compensation can be complex and costly if not done properly. Please contact our office for assistance in achieving the best tax result for you and your closely held business.
|